2.1.1 + 2 Economic Growth and Inflation

economic growth

an increase in a country’s real GDP over time

measuring economic growth

measured by calculating the % change in a GDP over a specific period (new - old GDP/old GDP)

real economic measures

values are adjusted for inflation and reflect changes in the price of goods and services produced

nominal economic measures

values are not adjusted for inflation and represent current market prices

Gross Domestic Product (GDP)

the total monetary value of all goods and services produced within a country in a time period

GDP Per Capita

represents the average GDP per person and calculated by dividing the GDP by the whole population

Gross National Income (GNI)

GDP + total income earned by a country’s residents both domestically and abroad

GDP vs GNI

GDP focuses on output whilst GNI focuses on income

Purchasing Power Parity (PPP)

the idea that items should cost the same in different countries based on exchange rates

limitation of GDP

income distribution (does not account for income inequality), non market activities (does not account for activities like household labour and informal economies) and quality of life (does not measure factors like healthcare and education)

Easterlin Paradox

life satisfaction aligns with rising income up to a point, beyond that the marginal gain in happiness declines

inflation

the sustained increase in the general price level of goods and services in an economy over time, (leads to a decrease in PPP)

deflation

a sustained decrease in the general price level

advantages and disadvantages of disinflation

can increase PP but can discourage spending + investment, also consumption may decrease as consumers anticipate further falls in price levels

disinflation

when the rate of inflation declines but remains positive, prices are rising but at a slower rate than before

consumer price index (CPI)

widely used measure of inflation in UK that tracks changes in the price of a basket of goods and services purchased by an average household. it is a weighted price index based on the spending patterns of households

limitations of CPI in measures of inflation

baskets of goods and services may not be accurate as consumer preferences are always evolving, substitution bias causes consumers to adjust their spending patterns in response to price changes, geographic variation (may not represent regional variations properly), the experience varies among subgroups and demographics

demand pull inflation + factors

occurs when AD exceeds AS, leading to an upward pressure in prices. this can be caused by increased consumer spending, business investment or gov expenditure

cost push inflation + factors

occurs when product costs increase, causing firms to raise prices to maintain profitability. factors like rising raw material prices, higher wages and supply chain disruptions can lead to cost push inflaqtion

effects of inflation on consumers

inflation erodes PP of money, reducing real value of savings. fixed income earners may experience reduced real incomes. people on fixed pensions may find it more challenging to maintain their standard of living

effects of inflation on firms

experience rising production costs and may adjust prices to maintain profitability

effects of inflation on the government

can increase cost of services gov debt, diverting resources from other public spending priorities, tax brackets may not be adjusted for inflation resulting in higher tax burdens

effects of inflation on workers

while nominal wage may increase, their real wage may decline so labour unions may negotiate for higher wages to keep pace with rising prices