2.3.1 Economic growth

GDP definition

• Gross Domestic Product

• Total market value of goods and services produced by an economy over a period of time

GNI definition

• Gross National Income

• Total market value of goods and services produced by citizens of an economy over a period of time

Measures of national income/economic growth

• Rate of change of real GDP

• GNI

Real GDP/GNI definition

Adjusted for changes in price/inflation

• Allows comparisons of economic growth over time

Per capita GDP/GNI definition

Adjusted for population size - GDP/population

• Allows comparisons between countries of different sizes, measures economic activity of each person

Value vs Volume GDP/GNI

• Value (real): Total revenue from sales/ adjusted for inflation

• Volume (nominal): Number of units sold/ monetary value at current prices

Comparing GDP against GNI

• GDP > GNI: Economic output mostly from foreign firms → money flows out

• GDP < GNI: Economic output mostly from citizens abroad → money flows in

PPP

• Purchasing Power Parity

• Exchange rate, takes into account differences in cost of living in different countries (cost of living)

Recession

Negative economic growth over two quarters (6 months)

Limitations of GDP/GNI

• Statistical inaccuracies

• Hidden economy

• Home production

• Public sector

• Improving quality of goods and services

• Impact of pollution

• Inequality & happiness

Statistical inaccuracies

Inevitable mistakes made during calculations

• Especially in less developed economies

Hidden economy

• Transactions in cash form that can’t be accounted for

• Income not declared to tax authorities (illegal…)

Home production

In less developed economies, products produced at home and not traded (self-sufficient) not accounted for in income statistics

Public sector

Free education/healthcare.. not accounted for

Indicators of national happiness and wellbeing

• GNH (Gross national happiness)

• OECD BLI (Better life index) - more categories measured

• HDI (Human development index) - Life expectancy, education and income

Easterlin Paradox

• Happiness and income positively correlate for low levels of income

• Once basic needs are met, increasing income doesn’t necessarily meaning increased happiness