2.1.1 Economic growth Flashcards
Economic growth
the rate of change of output
Short run economic growth
The annual percentage change in Real National Output most commonly measured by Gross Domestic Product ( GDP )
Long run economic growth
The maximum potential output of the economy using all factor resources as illustrated on the Production Possibility Frontier .
Gross Domestic Product ( GDP )
measures the total value of all finished goods and services produced within one economy in one year . It estimates the size of and growth in the economy .
flow concept vs stock concepts
GDP is a flow concept as it calculates how much income was generated in a one year period . This could be compared to how much a person earns in a year . A stock concept is an accumulation of all the wealth a person or a country has . This could be compared to a person’s total savings and assets
Real vs. Nominal
Real values adjust for inflation and reflect changes in the quantity of goods and services produced. Nominal values are not adjusted for inflation.
Total vs. Per Capita
Total : Total values represent the aggregate sum of a variable for a given population or area .
Per Capita : Per capita values represent the average amount per person and are calculated by dividing the total by the population .
Value vs. Volume
Value : Value represents the monetary worth of goods and services produced . Volume : Volume measures the physical quantity of goods and services produced , disregarding their monetary value .
Nominal
- Gives monetary values for data - this is also known as money GDP
- This money ( or nominal ) data is not inflation adjusted
- Data for GDP is expressed at current prices ( today’s prices )
Real
Real data is adjusted for for the effects of price inflation
Prices are held at the level of a chosen base year
The GDP data is then expressed at constant prices
Converting Nominal GDP to Real GDP
In one year , an economy had a nominal GDP of £ 12 billion
During that year , inflation was 6 % .
Calculate the value of real GDP compared to the previous year
Real value in current year = ( Nominal value in current year / price index in current year ) * 100
Real value in current year = ( £ 12bn / 106 ) x 100
Real value in current year = £ 11.32 billion ( at constant prices )
Gross National Income ( GNI )
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.
This means that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather than GDP because of the growing size of remittances and aid.
Remittances
money that is sent by a foreign worker back to their own country
Gross National Product ( GNP )
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically ( GDP ) and overseas. This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
Comparisons of rates of growth Over time
Changing national income levels will show us whether the country has grown or shrunk over a period of time:
- Examining growth rates over time reveals economic patterns and trends .
- Long - term analysis can identify periods of economic expansion , recession , or stagnation .
It is important to use real , per capita figures . If a country’s population grows over time , then this may cause a rise in GDP without a rise in living standards and so provide inaccurate comparisons . We use real GDP in order to strip out the effect of inflation . Inflation is rising prices and therefore can give the impression of GDP growing without any more services and goods being produced .
Comparisons of rates of growth Between countries
- When countries have a difference in population , a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons , we work out GDP per capita . It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country , so real GDP figures need to be calculated .
- They provide insight on the effectiveness of government policies.
Purchasing power parity ( PPP )
Purchasing power parity ( PPP ) is the idea that items should cost the same in different countries , based on the exchange rate at that time . PPP measures how many units of one country’s currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency .
How does PPPs help us compare living standards?
In countries where the relative cost of living is high such as Norway and Switzerland , there will be a downward adjustment to a nation’s PPP - adjusted GNI per capita . In nations where the relative cost of living is low such as India , the real purchasing power of $ 1,000 will be higher and this leads to these countries seeing their PPP - adjusted per capita incomes rising in global league tables . They provide an alternative to using exchange rates for comparisons of GDP . These are useful when comparing countries as it takes into account the cost of living ( how much has to be spent to maintain living standards ) , and so will help us better compare living standards .
The Big Mac Index
The Big Mac Index measures each currency against a common standard- the hamburger sold by McDonald’s all over the world - manufactured in a standardized size , composition and quality By converting the average national Big Mac prices to United States dollars , the same goods can be compared. This can tell us something about whether a currency is under or overvalued in foreign exchange markets .
How does the inaccuracy of data contribute to the limitations of GDP?
- Some countries lack efficient data collection and calculation, making comparisons less effective.
- A hidden market exists where people work without declaring income to avoid taxes or benefits, leading to underestimation of GDP. This varies widely between countries and may change over time. The UK’s informal economy is estimated to be 10.3% of GDP, representing approximately $358 billion (2023).
- GDP excludes home-produced services, such as subsistence farming, and DIY services in the UK.
- Inflation rate errors result in slightly inaccurate real GDP. Methods used to calculate GDP change over time, making comparisons difficult.
- Different countries use varying methods.
- Transfer payments, such as unemployment benefits and pocket money, are not included. Non-monetary transactions, like housework, are excluded.
- Negative externalities, like pollution caused by economic growth, are not considered.
What are the problems with comparing GDP between developing and developed countries?
Developing countries more often consume what they produce and don’t offer it for sale on the market . Therefore , it has no monetary value. Developed countries often increase incomes at the expense of quality of life . For example, stress , long working hours, and congestion when travelling. Developing countries might wish to achieve growth at the expense of health and safety.
What types of spending is a limitation of comparing GDP over time and between countries?
Some types of expenditure , such as defence , does not increase standard of living but will increase GDP . For example , the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War . This therefore makes comparisons difficult as spending varies over time and between countries .
How is the increasing quality of goods and services a limitation of comparing GDP over time?
The quality of goods and services is much higher than those fifty years ago , but this is not necessarily reflected in the real price of these goods and services . Therefore , living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly . Improved technology may allow prices to fall , suggesting falling living standards , when this is not the case .
What are the six key factors in the UN happiness report?
real GDP per capita , health , life expectancy , having someone to count on , perceived freedom to make life choices , freedom from corruption , and generosity .
Income per head
Real GDP divided by the population = Income per head
Real means that the income data has been adjusted for the effects of price inflation.
How can we move beyond income per head?
- Look at disposable income rather than gross income ( not least because the burden of taxes varies between nations )
- Focusing on income per head can ignore deep - rooted inequality
- Median disposable income might be a better measure of living standards for people in the middle of the income distribution
- Income per capita is not always a reliable guide to well - being
Disposable income
the amount of money households have available for spending and saving after direct taxes such as income tax and national insurance contributions have been accounted for . It includes earnings from employment , private pensions and investments as well as cash benefits provided by the state .
Median household disposable income in the UK in 2022
£32349
Mean household disposable income in the UK in 2019
£39328
Limitations on data on income per head
Changes in the distribution of income ( known as relative poverty )
Official data on incomes can be inaccurate - existence of shadow economy where income is earned but not registered for taxation
Regional and local variations in per capita income + rural / urban gaps
Changes in length of working hours and job conditions & security
Problems in accurately measuring a nation’s GDP and price inflation - makes it harder to assess real incomes
UK National Wellbeing
In 2010 , the UK Prime Minister launched the Measuring National Wellbeing report to measure how lives are improving. They found that self-reported health , relationship status, and employment status most affect personal well-being . They asked 4 key questions about life satisfaction , anxiety , happiness, and worthwhileness , where people answer on a scale of 0 “ not at all “ to 10 “ completely.” The report is now updated on a quarterly basis , rather than annually. In 2012-2016 , life satisfaction , happiness, and worthwhileness have continued to rise whilst anxiety levels fell but have begun to rise slightly . This could be as unemployment is falling and GDP is rising, but concerns over global security could be causing anxiety .
Why is GDP a flawed guide to living standards ?
Ignores the distribution of income and wealth
Need to consider changing working hours / work - life balance
Does not include the value of non - marketed output and unpaid work such as family care and voluntary activities
Rising real GDP may not be sustainable- risk of lost natural capital
Defensive spending such as cleaning up the effect of pollution & waste and crime prevention add to GDP but hurt welfare
May not capture value of free services including digital economy
Economic well - being
refers to the overall quality of life and material prosperity enjoyed by individuals and households . It encompasses various aspects , including income , consumption , access to basic needs and services wealth accumulation , job security , social safety nets , and overall life satisfaction . Measuring economic well - being is crucial for understanding how individuals are faring within the broader economic context and for evaluating the effectiveness of economic policies .
Subjective happiness
refers to self - reported levels of happiness with one’s life so differs between individuals
The Easterlin Paradox
Psychological research shows a positive relationship between happiness and income at low incomes. However, higher incomes don’t necessarily lead to increased happiness. Richard Easterlin argued that life satisfaction rises with average incomes but only up to a certain point. Beyond that, the marginal gain in happiness declines due to diminishing returns. Material consumption increases happiness if basic needs (shelter and food) aren’t met, but it doesn’t increase long-term happiness once these needs are satisfied. For instance, in the UK, even if GDP doubles, happiness won’t increase since we already have a high standard of living.
The Happy Planet Index
The Happy Planet Index measures life expectancy , experienced well - being , inequality of outcomes , and ecological footprint in order to determine the countries that can deliver the longest and happiest , but also most sustainable lives to their residents . The Index works to measure efficiency by ranking countries relative to how they offer their people long and happy lives , for each unit of environmental output .
Human Development Index
The HDI is a summary composite measure of a country’s average achievements in three basic aspects of human development : health , knowledge and standard of living .
It is a measure of a country’s average achievements in three dimensions of human development :
- a long and healthy life , as measured by life expectancy at birth .
- knowledge , as measured by mean years of schooling and expected years of schooling
- a decent standard of living , as measured by GNI per capita in PPP terms in US $
World Happiness Report
The World Happiness Report is a publication of the Sustainable Development Solutions Network , powered by the Gallup World Poll data . The World Happiness Report reflects a worldwide demand for more attention to happiness and well - being as criteria for government policy . It reviews the state of happiness in the world today and shows how the science of happiness explains personal and national variations in happiness .
Gross National Happiness
Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan , Jigme Singye Wangchuck in the 1970s . The concept implies that sustainable development should take a holistic approach towards notions of progress and give equal importance to non- economic aspects of wellbeing .
Doughnut Economics
A visual framework for sustainable development - shaped like a doughnut or lifebelt - combining the concept of planetary boundaries with the complementary concept of social boundaries .
How can understanding the circular flow of income allow us to work out economic growth?
When injections > leakages, economic growth rises.
When injections < leakages, economic growth falls.
When injections = leakages, economic growth does not change - macroeconomic equilibrium.
macroeconomic equilibrium
When injections = leakages, economic growth does not change
How can the circular flow of income be used to calculate GDP?
Output method = total number of all goods and services produced within an economy in a year
Income method = total of all factor incomes earned within an economy in a year
Expenditure method = Aggregate demand/total expenditure (C + I + G + (X-M))
Output = income = expenditure (same circular flow of income)
Economic well-being
refers to the overall quality of life and material prosperity enjoyed by individuals and households. It encompasses various aspects, including income, consumption, access to basic needs and services, wealth accumulation, job security, social safety nets, and overall life satisfaction.
What factors tend to influence your happiness?
your personality and genetics , social influences ( including a network of close friends ) , income and wealth ( to a smaller degree than you might expect ) , health , and ability to enjoy leisure time
How is subjective happiness measured?
usually determined using questionnaires .
Measuring subjective happiness usually involves considering emotions , rather than asking about material well - being .
