2.1.1 Economic growth

What is GDP?

Total monetary value of all goods and services that are produced in a country in the period of a year

What is economic growth?

The change in the total gross domestic production from one year to another and it can be both positive and negaitice

What is the calculation for growth rate?

(real gdp y2 - real gdp y1)/ real gdp y1 x 100

Why is economic growth important?

•Shows us changes in the size of the economy

•Provides us information about the economy's performance

•Allows Governments to make policy decisions

What is inflation

The general increase in price levels from on period to another

Define Real economic growth

Adjusted for inflation ( nominal GR - inflation rate)

Define Nominal economic growth

not adjusted for inflation ( real GR + Inflation rate)

How can you measure eocnomic performance?

- GDP

- GNI

- GNP

What is total GDP?

total vale of goods and services produced in an economy in a year

What is GDP per capita?

-GDP divided by county's population

-Gives average output or average income of population

- easier to compare living standards between countries.

What is GNP?

measures good and services produced by a country's resident regardless of location

What is GNI?

•measures the dollar value of goods and services produced by a country and income of residence earned domestically and overseas

Define Value

total worth of goods and services that are produced

Define Volume

The total amount of goods and services that are produced

What is purchasing power parity (PPP)?

- measures prices at different locations using a common basket of goods

- in theory PPP and exchange rates should converge in the long run (identical goods should sell for a similar price)

What is the calculation for PPP?

PPP = cost of good x currency 1 / cost of good x in currency 2

What factors affect PPP?

- factors impact prices of goods ( transport costs, trade tariffs etc.)

- factors impact exchange rate ( govn. policy, fixed vs flexible

What's the link between PPP and exchange rates?

PPP is the exchange rate between 2 countries and is equal to exchange rate in the LR as they converge

What are the benefits of GDP as a measure?

•Easy to measure and compare performance over time

•Correlates with other development index

-Human development index

•Higher income correlates with greater standard of living

-Education, healthcare and access to goods and services

What are the limitations of GDP as measure?

•Non-marketed items

-Items that are free of charge.

•The underground economy (Shadow Economy)

•Doesn't show inequality and wealth gap

•Doesn't reflect work life balance (leisure vs work hours)

•Healthy life expectancy

•Education rates

What ae the disadvantages of economic growth

- inflation : causes increase in price level and decreases consumer PPP

- use of renewable resources : higher growth leads to greater pressure on such resources

- inequality : causes increased income gap; some can't access essential G&s

- CAD : imports> exports so more more money outflows

- disease of affluence : higher health issues in HICs (e.g. diabetes)