4.2.1.4 uses of national income data Flashcards
when does economic growth occur?
when there’s a rise in the value of GDP
what does GDP measure?
the quantity of goods and services produced in an economy
what does economic growth lead to?
higher living standards and more employment opportunities
what is real GDP?
the value of GDP adjusted for inflation
what is nominal GDP?
value of GDP without being adjusted for inflation
what is the total GDP?
the combined monetary value of all goods and services produced within a country’s borders during a specific time period
what’s GDP per capita?
the value of total GD divided by the population of the country
- essentially measures the average output per person in an economy
- useful for comparing relative performance in countries
how can national income be measured by GNP?
Gross National Product (GNP)
- is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country
- includes GDP + income earned from overseas assets - income earned by overseas residents
- GNP includes products produced by citizens of a country, whether inside the border or not
how can national output be measured by GNI?
Gross National Income
- the sum of value added by all producers who reside in a nation
- plus product taxes (- subsidies) not included in the value of output
- plus receipts of primary income from abroad
(this is the compensation of employees and property income)
what are purchasing power parity exchange rates? (PPP)
- using PPPs is the alternative to using market exchange rates
ultimately means:
equalising the purchasing power of 2 currencies by accounting for differences in inflation rates and cost of living in each country
the actual purchasing power of any currency is…?
- the quantity of that currency needed to buy a specified unit of a good or a basket of common good and services in that country
how is PPP determined in each country
based on its relative cost of living and inflation rates
what does the World Bank construct and release every three years?
- a report that compares various countries in terms of PPPs and US$s
- these reports revel that typically when PPPs are used, the gap that exists between wealthy countries and poverty-stricken nations is narrowed substantially
how is the exchange rate determined in market exchange rates?
and by using what?
- exchange rate is determined by the interaction of demand and supply for the currency
- vast majority is by speculators (ppl who buy and sell currency to make profit)
- some is by individuals going abroad / buying imports
- firms buying imports / selling exports
how is the exchange rate determined in PPP exchange rates?
determined by comparing:
- price of an identical basket of goods between 2 countries
what would we expect if the market rate and PPP exchange rate were different?
theoretically
- expect the market rate to adjust to the PPP exchange rate over time
what happens to the exchange rate if inflation is high?
if inflation were higher in one country we’d expect their exchange rate to fall
what are 2 pros of the PPP theory of exchange rates?
1) not affected by speculation
- this would change the exchange rate but not the internal value of goods in a country
2) uses an identical basket of goods to compare countries
- allows us to compare on a like-for-like basis
3) helps to minimise misleading comparisons between countries
what are 2 cons of the PPP theory of exchange rates?
1) in reality, the exchange rate is mostly determined by speculative investment
- these often move the real exchange rate away from the PPP value
2) it’s difficult to truly compare an identical basket of good in different countries which have different labour costs, tastes etc
what are the limitations of national income data to compare differences in living standards between countries?
1) GDP doesn’t give any indication of the distribution of income
- two countries with similar GDPs per capita may have different distribution which lead to different living standards in the country
2) GDP may need to be recalculated in terms of purchasing power so that it can account for international price differences
- purchasing power is determined by the cost of living in each country and the inflation rate
3) large hidden economies (known as the shadow economy)
- such as the black market
- income from transactions that are legal or illegal but unrecorded
- these aren’t accounted for in GDP
- can make GDP comparisons misleading and difficult to compare
4) GDP gives no indication of welfare
- other measures like the happiness index, might be used to compare living standards instead / in conjunction with GDP
what is The Big Mac Index?
- a way of measuring PPP between different countries
- by converting the average national Big Mac prices to U.S dollars the same good can be informally compared
- can tell us something about whether a currency is under/overvalued in the foreign exchange markets
- can also be a good indicator for the individual purchasing power of an economy since the product exists worldwide in standard size, composition and quality
- some price differences can be explained by variations in indirect taxes, wages, rent levels and other operating costs
what are some limitations of GDP as a measure?
1) accuracy of stats
2) ignores work without a monetary value
3) doesn’t consider negative externalities
4) doesn’t show inequality in distribution
5) no account of innovation, quality, changes in working conditions
what does happiness economics look at?
- happiness economics looks at how content individuals ar with their life from a theoretical and scientific viewpoint
- has come about because standard measures of living standards don’t take into account contentment
- the Government now research national wellbeing (how happy one perceives themselves to be)
what is Gross National Happiness (GNH) looking at?
- living standards
- psychological wellbeing
- health
- time use
- education
- cultural diversity and resilience
- good governance
- community vitality
- ecological diversity and resilience
the UN regularly publish a World Happiness Record - what does this identify?
identified six factors that impact on happiness:
- real GDP per capita
- healthy life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
- generosity
