2.1.1 Economic growth

What is the output of an economy

Gross Domestic Product

What does an economy having output mean

An economy having output means it is producing goods and services, generating value and driving activity

What is GDP

The value of all goods and services produced in an economy during a specific period of time

How do you determine economic activity

Measure the rate of change of GDP in an economy

How can GDP be measured

The expenditure approach, The income approach

What is the expenditure approach for measuring GDP

Adds up the value of all the expenditure in the economy, This includes consumption, government spending, investment by firms and net exports

What is the income approach for measuring GDP

Adds up the rewards for the factors of production used such as wages from labour, rent from land, interest from capital and profit from entrepeneurship

What are the factors of production

CELL (Capital, Enterprise, Land, Labour)

What is nominal GDP

The actual value of all goods and services produced in an economy during a specific period of time.

Is there an adjustment in terms of nominal GDP

There has been no adjustment to the amount based on the increase in general price levels (if GDP is quoted to be at current prices, its nominal)

What is real GDP

The value of all goods and services produced in an economy during a specific period of time and adjusted for inflation. (if quoted at constant prices, its real)

Why is GDP not the best metric to measure a country’s output or wealth

It only measures the value of production within a country’s borders

What is GNI? ———- stopped here

Measures the total income earned by a country’s residents and businesses regardless of where that income is generated during a given time period

What does GNI add up

The income residents receive from the rest of the world then subtracts the income that non-residents earn inside the country

How is GNI often used?

To compare the economic wellbeing of a country’s residents or to set eligibility thresholds for development assistance because it traces income to the nationality of the earner rather than the geographic place of production

Why are national income statistics useful

To make comparisons between countries, provides insights on the effectiveness of government policies and allows judgements to be made about the relative wealth and standard of living

Why is real GDP better than nominal GDP

One country may have a higher rate of economic growth but also a much higher rate of inflation

What is GNP

Gross National Product is the the sum of all domestic and foreign output generated by the citizens of a given country

What is PPP

Purchasing power parity is a conversion factor that can be applied to GDP, GNI and GNP

What does PPP do

Calculates the relative purchasing power of different currency, shows the number of units of a country’s currency that are required to buy the same basket of products in the local economy

What is the aim of PPP

To make a more accurate standard of living comparison between countries where goods and services cost different amounts

Limitations of GDP for comparisons

Lack of information provided on inequality- the differences in the standard of living within the same country can be significant, Quality of goods and services, Differences in hours worked, Environmental factors

Relationship between real incomes and subjective happiness

Generally, the higher the GDP per capita, the higher the average life satisfaction score.

Relationship between real incomes and subjective happiness - negative

Once basic needs are met, higher income does not lead to increased happiness.

Easterlin paradox

Link between income and happiness, and these have a direct relationship up to a point, beyond this point the relationship is less evident

What is the formula for index numbers

Index numbers = Raw number /Base Year Raw number x 100

What is the base year value always

Base year always has an index value of 100

Percentage change formula

difference in two numbers/ original x100