2.1.1 - Economic Growth Flashcards
What is Real Growth?
An increase in real incomes or GDP.
What is Potential Growth?
- An increase in the productive potential of the economy
- Difficult to measure properly
What is Gross Domestic Product (GDP)?
- GDP is the measure of output of goods and services in a country in a year
- It is expressed in the local currency
What factors do you need to know to evaluate a country’s GDP? (3)
- Population
- Spending power of currency
- History of GDP
How can GDP be calculated? (3)
- Adding all goods and services produced in a country in a year
- Adding all incomes earned in a country in a year.
- Adding all expenditure in a country in a year.
What concept is used to explain why each method used to calculate GDP produces the same result?
The Circular Flow of Income
In reality, what happens that makes it so the GDP produced by the different calculations reach different results? (2)
Errors and Omissions
How can GDP be used as a sign of economic growth?
- GDP rising indicates higher incomes, output and spending
- Therefore, in theory, people are enjoying more goods/services and a better standard of living.
What are the weaknesses of using GDP as a sign of economic growth? (5)
- Increase in growth may have come about due to longer working hours
- Growth may have induced inflation and a higher cost of living
- Growth may not be distributed evenly
- Population growth may be greater than GDP growth, meaning people are overall worse off per head.
- Growth may be causing pollution or other social costs.
What is GDP Per Capita and why is it more useful in comparing different economies?
GDP / Number of People
- Takes population changes into account, allowing for better comparison of countries
What is Nominal GDP and what weaknesses does it have as a tool for comparison?
- GDP without taking into account inflation
- Not useful for comparison as growth-induced inflation reduces purchasing power of money
- Can offset the increases in people’s incomes through growth
What is Real GDP
- GDP adjusted to remove the effects of inflation
- Evaluates whether the growth actually creates benefit.
- e.g. nominal GDP ^ by 10% but inflation ^ by 4%, therefore Real GDP ^ by 6%
What is GDP measured by volume?
GDP measured by adding the number of products produced by a country in a year
What is GDP Measured by Value? Why is better than measuring by volume?
GDP measured by adding the value of products produced by a country in a year
- Better measure of GDP because it takes into account the revenue that each unit sold generates rather than just looking at numbers sold.
What is the Rate of Economic Growth?
A measurement of the annual % change in Real GDP
What is the Long Run Trend Rate of Growth? What is it in the UK?
- The sustainable rate of economic growth in an economy
- In the UK, this is about 2.5%
Measures of National Income (2)
- Gross National Product
- Gross National Income
What does Gross National Product measure?
Market value of all products produced in an annum by the labor and property supplied by the citizens of one country.
Includes GDP plus income earned from overseas assets minus income earned by overseas residents.
What does Gross National Income measure?
Sum of value added by all producers who reside in a nation.
Includes product taxes (subtract subsidies) not included in the value of output.
Plus receipts of primary income from abroad (compensation of employees and property income).
How are GNP and GNI better measures of a country’s economy than GDP?
Both GNP and GNI measure what is produced domestically AND overseas by an economy, whereas GDP only looks at what is produced at home
Factors to consider when comparing growth.
Wealth Status: High GDP with low growth can still mean more than low GDP with high growth.
GDP per Capita: Measures individual economic output.
Self-Consumption: Non-GDP included self-consumed goods can skew GDP figures.
Purchasing Power: Varying currency values affect purchasing power.
Calculation Reliability: Consistent and accurate measurement methods are key.
What are Purchasing Power Parities (PPPs)? How is it a better guide for actual living standards?
Reflects what the local currency can buy in its own economy, showing the actual value of goods and services people can purchase locally.
What does GDP at PPP stand for?
- GDP at PPP stands for Gross Domestic Product at Purchasing Power Parity.
- It adjusts Nominal GDP to reflect the relative costs of living and price levels between countries.
How is PPP exchange rate determined?
Determined by the cost of a standard basket of goods in each country, ensuring it has the same value in both currencies.
Example of GDP at PPP calculation?
If a basket of goods costs £1000 in the UK and $2000 in the US, the PPP exchange rate is £1 = $2. Adjusts GDP figures accordingly.
What is Real GDP at PPP?
Adjusts GDP at PPP to remove the effects of inflation, reflecting the real value of goods and services produced, evaluating relative costs of living.
What is Real GDP per Capita?
Real GDP per Capita measures a country’s economic output per person, adjusted for inflation.
Why might Real GDP per Capita not properly reflect purchasing power?
- Local purchasing power varies in different coutnries.
- e.g. $10 buys you a single meal in the USA, but converted to Indian Rupees, it can buy you 2 meals in India.
- Not just about how much money people have, but what they can do with it in their own country.
What is the Big Mac Index and how is it able to reflect exchange rates?
- Shows the Dollar cost of a Big Mac in different countries.
- Ingredients remain the same, so a difference in price reflects different exchange rates.
What are the limitations of GDP for comparing Living Standards? (5)
- Unaccounted output that affects living standards (Subsistence, Barter, Hidden/Informal Economy)
- Varying Currency Values
- Doesn’t describe income distribution.
- Doesn’t take account of Public Sector Spending and whether it is effective.
- Doesn’t take account of the long run benefit of spending income on capital goods.
What is the National Wellbeing Index (Gross National Happiness)?
An index that attempts to gauge the standard of living.
What does the National Wellbeing Index measure?
Evaluates the quality of various sectors that make up the wellbeing of the population, such as the economy, the environment and governance.
Includes positive statements, e.g. unemployment rate, voting rates, crime rates, etc.
Includes Surveys on normative statements about social life, personal health, etc.
What is the purpose of the National Wellbeing Index?
- Combines statistics and surveys to get a better overall snapshot of living standards and whether people.
- An attempt to move away from using purely financial indicators, which on their own may not increase wellbeing.
What are the limitation of the National Wellbeing Index?
- Surveys are normative. People’s perceptions of satisfaction may change due to unexpected factors, such as a national team losing a match.
- People may not always respond honestly, certain people may not want to be in surveys at all.
- So wide ranging that it can be hard to see overall trends.
