2.1 Measures Of Economic Performance

Question 1

Economic growth is a measure of an increase in…

Answer 1

… real gross domestic product (GDP). This is referred to as actual economic growth.

Question 2

Real GDP

Answer 2

The value of GDP adjusted for inflation. Therefore, using real GDP, it is possible to measure changes in the volume of output over time.

Question 3

Nominal GDP

Answer 3

The value of GDP without being adjusted for inflation. Nominal GDP is simply the money value of goods and services produced by a country in 1 year.

Question 4

Total GDP

Answer 4

The combined monetary value of all goods and services produced within a country’s borders during specific time period.

Question 5

GDP per capita

Answer 5

The value of total GDP divided by population of the country. It essentially measures the average output per person in an economy. This is useful for comparing the relative performance of countries.

Question 6

Gross National Income (GNI)

Answer 6

Measures income received by a country both domestically (GDP) and via net incomes from overseas.

Question 7

Purchasing power parities

Answer 7

• A theory that estimates how much the exchange rate needs adjusting so that an exchange between countries, according to each currency’s purchasing power.
• Purchasing power parity will involve looking at a basket of goods to determine effective living costs.

Question 8

Limitations of using GDP to compare Living Standards between countries

Answer 8

• Difference in population: it is necessary to calculate GDP per capita.
• Distribution of income: GDP does not give any indication of the distribution of income. Therefore, two countries with similar GDP’s may have different distributions which leads to different living standards in the country.
• Hidden economies: There are also large hidden economies, such as the black market, which are not accounted in GDP. This can make GDP comparisons misleading and difficult to compare.

Question 9

UK national wellbeing

Answer 9

• The UK Government undertakes regular surveys of personal well-being that make estimate of overall satisfaction with life. These surveys measure emotions, such as happiness and anxiety, and the extent to which people feel the things they do are worthwhile.
• These measures are strongly related to other important aspects of quality of life such as health, relationships and employments.
• These surveys provide an attempt to measure subjective happiness.

Question 10

Subjective happiness

Answer 10

A measure of how people feel about themselves

Question 11

The relationship between incomes and subjective happiness

Answer 11

• Research suggests that there is a positive relationship between income and happiness up to a certain level of income.
• However, once incomes increase beyond that level, marginal gains in happiness falls. This is referred to Easterlin paradox.
• A policy implication of Easterlin paradox is that governments need to focus not only on economic growth but also on other objectives such as income equality and a clean environment.