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

• GDP plus interest payments and dividends from overseas

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: Monetary value at the prices of the day

• Volume: Adjusted for inflation and expressed as an index/prices of a selected base year

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

• Payments in cash sometimes not accounted for as not declared to the government

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

NNI

• Net national income

• Measure of national income that is GNI minus depreciation, indirect taxes, and natural resource depletion

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

GGDP

Green GDP

• GDP definition + account for social & environmental costs of production

Actual vs potential growth

Actual: actual economic growth

Potential: Change in productive potential of economy

Securitization

Turning debts/loans into tradeable assets

• provide consumer with income from people paying back loans

Austerity

Cutting of government spending

• Cut taxes (as people struggle during recession)

• Reduce unemployment benefits

Credit crunch

Banks stop giving out loans due to lack of trust in economy

Transfer payments

Income that does not directly lead to increased economic output

• benefits, allowances, sale of second-hand goods

HDI

Measure of standard of living

• Measures income, life expectancy, environment, education

Standard of living

How well-off individuals, households or economies are

• Accounts for health, environment, education, political freedom