2.1.1 Economic Growth Flashcards
Gross Domestic Product (GDP)
the total value of national output of g/s produced in a given time period within an economy
Suggest two methods to work out GDP
1) Expenditure method: Consumer expenditure + Investment + Government spending + net trade (exports- imports)
2) Income method: adding up all the incomes within an economy (wages, interest, profits and rents)
Suggest how the expenditure method and income method should have the same value
- Consumers earn money through working for firms (income), then spend this income on goods/services (Expenditure)
- If a firm’s revenue exceeds their costs then they will earn a profit (Income) which they then may spend to hire more employees or expand their business (expenditure)
- Income = Output = Expenditure.
Nominal income
measures income at current prices with no adjustments for the effects of inflation
Increase in value of GDP
Real income
measures income at current prices with adjustments for the effects of inflation
Increase in volume of GDP
Inflation
- the ongoing increase in the average level of prices across the economy over a period of time (usually expressed as an annual rate)
- it means that the exchange (real) value of money is falling
Does real GDP use nominal or real income?
Real GDP measures the volume of output (real income)
Aggregate demand
the total amount of demand for all finished g/s produced
Difference between price and cost
Price is what you pay and cost is how much is cost to produce the good
What does increased output of GDP mean?
Aggregate demand has risen faster than the rate of inflation and therefore the economy is experiencing positive growth
Nominal vs real income example
If the value of computer within the economy rose by 10% but the inflation rate was 4% then real GDP would be 6%
Total GDP per capita
takes into account the difference in populations between countries
Total GDP per capita formula
Total GDP/Population = Total GDP per capita
Value vs volume of goods/services
- Value shows what certain goods/services are worth
- Volume shows the numbers of goods/service that are produced
Why is it important to distinguish between value and volume?
- In trade, although a country may import more goods/services than they export, they could still have a trade surplus
- This is because the value of exports may still exceed the value of imports
Gross National Product (GNP)
the total market value of all g/s produced by domestic residents (GDP) + income that residents have received from abroad
Gross national income (GNI)
GDP (measures the total value of national output of goods and services produced in a given time period within an economy) + income paid into the country by other countries for such things as interest and dividends
Difference between GDP and GDP per capita when comparing two countries
Comparing using GDP may be less valuable than comparing the GDP per capita since it allows for as easier comparison due to the fact that is take into account population differences
Difference between nominal and real data when comparing two countries
Using real data makes a better comparison since a country with a high inflation rate is likely = a higher GDP growth rate.
- Although a consumer’s real income might not have risen it may differ in nominal.
Economic growth
- an increase in production within the economy (important since our living standards are influenced by our access to goods and services)
- Without growth, individuals can only enjoy rising living standards at the expense of others in society
- More ppl producing= higher incomes
Purchasing power party
PPP figures are adjusted for differences in the cost of living between countries and helps compare the costs of living between countries since it’s how much you can buy with your income
(E.g although US have a higher GDP per capita than UK, they will be worse off since they have a higher cost of living, meaning their wages can buy fewer items than in the UK)
Higher PPP…
Higher PPP = better living standards since there’s a lower living ost
Standard of living
refers to income, quality of life and economic welfare
Problems with using GDP (GNP, GNI etc) to work out living standards
- does not include unofficial or unpaid work (childcare)
- It calculates what’s sold not produced (e.g blak market)
- Doesn’t take well being into account (stress levels, no hours worked, pollution)
- Equality: Increases in real GDP may not be shared equally among an economy’s population (a country might be producing a lot but it might go all to rich)
- Does’t work with comparisons since higher tax means a higher rate of black market
- Calculates the value of goods consumed by the produces rather than traded (particular issue in developing countries with higher levels of subsistence agriculture)
National Happiness
Measuring national happiness rather than focusing on economic variable
Nine domains in the Gross National Happiness Index
(Bhutan)
Psychological wealth
Health
Education
Time use
Cultural diversity and resilience
Good governance
Community vitality
Ecological diversity & resilience
Living standards
Relationship between income and happiness
Higher income ≠ more happiness
(E.g hairdresser makes 10,174 and CEO makes 117,000 but their happiness is around the same at 7.417 and 7.957
The Easterlin Paradox
- Economic growth doesn’t necessarily lead to more satisfaction
- The idea that happiness does rise with average incomes, but only up to a point.
- Beyond this, the marginal gains in happiness fall, perhaps because people care about relative as well as absolute incomes.
Three juxtaposition of observations of the Easterlin Paradox
- Within a society, rich people tend to be much happier than poor people
- But, rich societies tend not to be happier than poor societies
- As countries get richer, they do not get happier
Market liquidity
the extent to which an asset can b bought or solt at the current market price, without affecting its value
Credit crunch
an economic state characterised mainly by a sharp drop in confidence and a lack of credit (or loans)
Recession
a general decline in economic activity.
Expenditure
the action of spending funds
Surplus
the amount that remains when use or need is satisfied.
Problems with neg economic growth
- Happiness might be more important. A healthy economy needs to take into account welfare.
- Example Venezuela
Venezuela example
- has the highest inflation in the world, making food and medicine inaccessible
- high murder rate
- In 2004, oil price surge
- govt spent money on food subsidies, education and healthcare. The spending = growing deficit. This was unsustainable if oil prices fell.
- in 2014, oil prices plummeted
- exploited the currency system with setting the exchange rate at 10 bolivars per us dollar but only him and his allies had access to this.
- most Venezuelans get their dollars on the black market
Why econ growth is not the most important?
World Happiness Report 2019, Finland as the happiest
- Categories help account for difference in life satisfaction around the world: GDP per capita, healthy life expectancy, freedom to make life choices, social support generosity, absence of corruption
- e.g Venezuela
