2.1 Economic growth Flashcards
Economic growth
The rate of change of output.
->An increase in the long term productive potential of a country.
Gross domestic product (GDP)
The total value of all goods and services produced in an economy with in a year
->Measure of living standards
Real GDP
GDP adjusting for inflation (does not take into account effects of inflation)
Nominal GDP
GDP without adjusting for inflation (takes into account effects of inflation)
Total GDP
Total value of goods/services produced within an economy in a year
GDP per capita
Total GDP divided by the number of people
Value
Shows what certain goods/services are worth
Volume
Shows the number of goods/services that are produced
Gross national income (GNI)
GDP plus net income paid into the country by other countries for things such as dividends or interest
GDP per capita when comparing between countries
-If a country’s population grows, then this may cause a rise in GDP without a rise in living standards: This provides an inaccurate comparison.
-> GDP per capita takes into account population differences.
Real GDP when comparing between countries
If a country has high inflation, it is likely that it also has a higher GDP growth rate. Therefore, although consumer’s incomes have not increased in real terms, the nominal GDP growth rate may suggest otherwise.
Purchasing Power Parities (PPP)
-A rate at which the currency of one country would have to be converted into that of another to buy the same amount of goods and services in each country.
-PPP takes into account cost of living , so will help us better compare living standards
Problems with GDP: Inaccuracy of data
Some countries are inefficient at collecting or calculating data, and therefore comparisons are less effective.
Problems with GDP: Inequalities
An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in national income may not reflect living standards everywhere.
Problems with GDP: Spending
Some types of expenditure, such as defence does not increase standard of living but will increase GDP.
Problems with GDP - Underground economy
There is a ‘hidden’ or ‘black market’, in which people are working without declaring to avoid paying tax or continue claiming benefits, and so GDP is underestimated as these incomes are not taken into account.
Problems with GDP - Subsistence economy
GDP does not take into account home-produced services. In many poorer countries, people work as subsistence farmers where they grow and consumer their own crops without trading, so GDP is underestimated.
Easterlin paradox
An increase in consumption of material goods will increase happiness if basic needs
aren’t met (shelter and food), but once these needs are met, an increase in
consumption won’t increase long term happiness
(aka. happiness and income are positively correlated at low incomes but higher levels of income aren’t associated with increases in happiness)
