1.1 Measures of economic performance - economic growth Flashcards
What is GDP? What are the 3 ways to calculate it
GDP is the measure of the total value of national output of goods and services over a given time period
Output = Expenditure = National Income
What are the 3 ways to measure GDP?
- Output - value added from all firms and sectors output, the final price - cost of inputs or add up output of final goods/services
- Incomes - add up all incomes in the economy - profits of private and public sector businesses, rental income, transfers, rent, shares and dividends
- Expenditure in the economy - also known as AD - AD= C + I + G + (X-M)
What is economic growth?
Rise in the productive potential of an economy over a time period
In the short run is the increase in the real value of goods and services produced measured by GDP.
Contracted 4% in the recession
What are the features of growth
Short run:
- GDP, AD and Jobs
- Wages rise
- Unemployment falls
- Incomes and SOL rise
- Tax revenue rise
Long run
- Life expectancy
- Poverty/inequality
- Education
- Lower fertility
- Innovation and technology
- high commute times
What is real disposable income? What is GNI?
RDI - income after deduction of taxes and benefits, adjusted for inflation
GNI - remittances, wages, profits and interest all earned abroad
What is a contraction
- GDP falls, economy shrinks, growth negative
- May lead to recession or depression
Signs - AD falls, unemployment rise, firms leave market, house prices fall, spending rises to support poor, SOL fall
Benefits of growth
Household: incomes, choice, SOL, confidence, health
Work: incomes, choice of jobs and location
Firms: AD so investment, profit, new markets and environment to grow
Government: tax revenues reduce borrowing so easy to manage economy - social stability
Costs of growth:
Household: inflation, pollution, congestion, inequality
Workers: poorer conditions, inconsistent, unemployment, jobs move abroad
Firms: competition drives out market, congestion costs, inflation of costs and wages
State: inflation, worsen trade balance, unsustainable so downturn, cost of externalities
How do you convert from a nominal to a real value?
Say base year is $1,400 and index 100
And new year is $1,450 and index 103
R = real value
Divide the new value by its index then times it by 100 to put it back into 100 index, giving $1,408
What is the circular flow of income?
Firms provide goods and services to households as well as give rent, wages and dividends
Households provide land, labour and capital to firms and give expenditure
What are the benefits of using real GDP
- Easy comparisons over time
- Easy comparisons with different countries
- Correlates other living standards measures e.g. HDI
- Higher income generally coincides growth and living standards
- Sets interest rates
- Plans policies, tax and spending plans
- Estimates budgets
What are the flaws in using GDP
- Lagging indicator
- Ignores shadow economy and illegal activity
- Estimated hidden economy to be £3.5bn in 2015, 13% of the economy
- Flash indicator inaccurate
- Growth rates inform us growth but not growth of output
- Does not tell us much except rate growth changes
- GDP on its own does not account for GNI stuff
- Does not account for depreciation - NNP = GNP - depreciation of capital
- Informal economy ignored
- Illegitimate goods/services avoid tax
- Short term measurement, not fully accurate
- Unpaid work e.g. babysitting family
- Investment not accounted for e.g. R&D, advertising, training and research
Flaws of measures in general
- Inequality
- Changes in working conditions
- GDP no allowance for depreciation
- Valuation of changes in life expectancy
- Non market output e.g. voluntary work
- Innovation and improvements in public services which do not add value
- GDP growth may be unsustainable if coincides draining resources
- Ignores quality of goods and services
- Defence expenditure
- Debt
- Other factors not considered - literacy, equality etc.
What is the difference between growth and welfare?
-Growth sustained growth of real GDP, living standards and productive potential
Welfare is a more broad measure of well being, not linked to material aspects of life .g. inequality, median house incomes. May include:
- Real GDP/Capita
- Real household spending/capita
- Median incomes
- Household net wealth
- Unemployment
- Financial security
What is the Easterlin Paradox?
-Richer people tend to be happier than poor people, and richer societies do not tend to be happier than poor societies.
As countries get richer, they do not inevitably get happier. Happiness only rises up to a point and after that the marginal gain declines.
This may be because people would rather get relative rewards than everyone else benefitting more
