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What is the Gross Domestic Product(GDP)?
It measures the total value of national output of goods and services produced in a given time period(usually a year or per quarter of a year).
Three ways of calculating GDP:
Output=Expenditure
(Aggregate Demand)=National Income
How is GDP expenditure measured by?
Consumption
Government spending
Investment spending
Change in value of stocks
Exports
(minus)Imports
=GDP(also known as AD)
AD=C+I+G+X-M
How is GDP(Income) measured?
Incomes for people in jobs and in self-employment from their wages and salaries.
Profits of private and public sector buisnesses
Rental income from ownership of land
(Transfer payments are excluded)
How is GDP(Output) measured?
Value added from each of the main economic sectors.
These sectors are:
Primary(e.g. farming, fishing and mining)
Construction
Manufacturing
Tertiary(e.g tourism)
Quaternary(e.g businesses consultancy)
Measuring Economic Growth:
Economic growth is typically measured by calculating the percentage change in real GDP over a specific period, such as a year.
Formula for measuring economic growth:
The formula for growth rate is: Growth Rate = [(GDP at Time 2 - GDP at Time 1) / GDP at Time 1] × 100.
What does economic growth refer to?
Economic growth refers to the increase in a country's real GDP over time.
It signifies an expansion of an economy's production capacity and is a key indicator of its overall economic health.
What is short run economic growth?
Increase in the real value of goods and services produced and is measured by the annual percentage in real GDP.
What is long run economic growth?
An increase in a country’s productive capacity/potential output.
Nominal GDP:
Monetary value of the national output of goods and services measured at current prices.
(We can also that this is a ‘value’ of a measurement)
Real GDP
Involves taking inflation into account-where money GDP is adjusted for changes in the price level-we say that GDP is measured in constant prices.
(We can say this is a volume measurement)
Real GDP per capita:
Real income per head of population expressed at constant prices
Real Disposable Income:
Income after deduction of taxes and benefits, and adjusted for the effects of inflation.
What is Gross National Income?(GNI)
GDP plus net property income from overseas.
What is included in GNI?
Remittance money transfers are included in GNI and are important for some lower and middle-income countries.
What is GNI per capita and why is it used?
Used when calculating the Income component of the Human Development Index(HDI).
What does PPP stand for?
Purchasing Power Parity
What does PPP measure?
Measures how many units of one country’s currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency.
What happens to PPP with countries that have a relative cost of living is high?
There will be a downward adjustment to a nation’s PPP-adjusted GNI per capita.
Why is it good to use GDP per capita at PPP,or GNI per capita at PPP?
It gives us a much better idea of living standards than simply GDP per capita alone.
Key benefits of using real GDP when assessing changes in living standards:
1.Easy to make comparisons over time
2.Easy to compare different countries e.g high and low growth countries
3.It correlates with other measures of living standards including HDI.
4.Having a high income generally correlates with being able to buy more goods and services(which can include things such as education and healthcare and better housing)
Flaws in measured GDP as an indicator of changes in living standards:
1.GDP tends to understate real nations income per capita due to the shadow economy and also the value of unpaid work done by volunteers and people caring for their family.
2.The shadow economy includes illegal activities such as drug production and distribution,prostitution,theft,fraud and concealed legal activity such as tax evasion on otherwise-legitimate business activities such as non-reported self-employment income.
3.The UK government estimated the ‘tax gap’ to be approximately £1.5bn in 2021-22
4.In 2014 the UK started to include estimates of incomes and spending from the shadow economy in their GDP.
Limitations of published data as a guide to living standards:
1.Scale and depth of household/regional inequalities of income and wealth.
2.Changes in leisure and working hours and overall working conditions-affecting work-life balance.
3.GDP makes no allowance for depreciation of capital machinery and technology.
4.Value of non-market output and unpaid work e.g. voluntary care
5.Valuation of changes in years of people’s healthy life expectancy
Economic growth in more depth:
Growth is a sustained growth of real GDP over time.
Contributes to rising average living standards i.e a higher per capita GDP/GNI
Long run increase in a country’s productive potential/productive capacity
Economic welfare:
A broader measure of well-being(i.e social and economic factors are considered)
Many aspect of well-being are not directly linked to material aspects of life
Welfare measure might include changing levels of inequality and median household incomes
What is economic wellbeing?
A statistic collect by the ONS,that considers the personal life satisfaction/anxiety/stress of citizens.
What indicators are there for economic wellbeing?
Real Gross Domestic Product per capita
Real household spending per head
Median household income
Household net wealth(i.e value of assets minus liabilities)
Unemployment rate and the employment rate
Financial situation of households and their feeling of security
What is median incomes?
It is the income of the middle household if all are ranked from lowest income to the highest.
What is a household’s income made up of?
All its earnings and investment income(including private pensions),plus cash benefits received from the state,minus direct taxes such as Income Tax and Council Tax.
What does subjective happiness refer to?
To ‘self-reported’ levels of happiness with one’s life, usually determined using questionnaires.
What does measuring subjective happiness usually involve?
Involves considering emotions, rather than asking about material well-being(i.e possessions,income,health,etc).
What is the Easterlin Paradox?
People believe that more money will make them happier than it actually does.
The Easterlin Paradox
Associated with US economist,Richard Easterlin.
It concerns whether we are happier and more contended as our real living standards improve.
Within a society,richer people tend to be happier than poor people.
As countries tend to get richer, they do not inevitable get happier
What does Richard Easterlin argue how life satisfaction rises?
It rises with average incomes but only up to a point.
Beyond that marginal gain in happiness declines.
