Economic Growth

Question 1

Rates of change of real GDP as a measure of economic growth

Answer 1

GDP measure the value of all final goods/services produced in an economy in a year.

Question 2

Expenditure method of working out GDP value of an economy

Answer 2

Four main components that are added up in order to get GDP value. These include consumer expenditure, investment, government spending and net trade (exports-imports)

Question 3

Income method of working out GDP

Answer 3

Adding up all the incomes within an economy (wages,interest, profits and rents). The GDP value from the income method and expenditure method should always be the same

Question 4

Difference between nominal and real GDP

Answer 4

Nominal GDP is the value of final goods/services within an economy without adjustment for inflation. Real GDP is the same as GDP but takes into account inflation.

Question 5

Difference between Total GDP and GDP per capita

Answer 5

Total GDP is the total value of goods/services within an economy in a year. On the other hand, GDP per capita takes into account the differences in populations between countries. It does so by taking the GDP figure and dividing it by the country’s population.

Question 6

Difference between value and volume

Answer 6

The value of goods/services shows what certain goods/services are worth. However the volume shows the number of goods/services that are produced. Important in trade-country may import more than they export, but value of exports may be more than value of imports.

Question 7

Gross national income (GNI)

Answer 7

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.

Question 8

Gross national product (GNP)

Answer 8

Included value of g/s produced by citizens regardless of their location. This means that the output of citizens working abroad is included in the sum (even those that don’t send back their income as remittance) however GNP excludes the output from foreign workers located in domestic country. Therefore GNP=the final value of all goods and services produced by domestic residents (GDP) plus income that residents have received from abroad, minus income claimed by non-residents.

Question 9

Understanding of purchasing power parities (PPPs) and the use of PPP-adjusted figures in international comparisons

Answer 9

PPP helps to compare the costs of living between countries. Eg if the basket of goods in the Uk is equivalent of £400 but the basket of goods in America is worth £800 then the purchasing power parity is 1:2. Therefore although America may have a higher GDP per capita than the UK, American citizens will be worse off. If GDP per capita in the Uk was equivalent to £80,000 and GDP per capita was £100,000 in US then UK GDP (PPP) would be £80,000 and US GDP (PPP) would be £50,000.

Question 10

Making comparisons about growth over time

Answer 10

Changing national income levels will show us whether the country has grown or shrunk over a period of time.

-the data is compared to other countries to put figures in a context. Growth figures over a set period of time can be compared against similar countries to see whether the country has done well or not.

-The figures can also make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.

-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.

Question 11

Making comparisons about growth between countries

Answer 11

When countries have a difference in population, a difference in total GDP doesn’t necessarily mean 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.

Question 12

Problems of using GDP to compare standard of living-inaccuracy of data

Answer 12

-some countries are inefficient at collecting or calculating data and therefore comparisons can become less effective

-There is a ‘hidden’ or ‘black’ market in which people work without declaring their income to avoid tax or to continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account.

-GDP doesn’t take into account home-produced services

-errors in calculating the inflation rate means real GDP will be slightly inaccurate.

-over time methods used to calculate GDP will change and so therefore it can be difficult to compare countries over time. Similarly, different countries may use different methods to calculate GDP.

-Also, it is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. For example the government taxes people who are employed and then gives it straight to the people who are unemployed. Also pocket money.

Question 13

Problems of using GDP to compare standard of living-inequalities

Answer 13

An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the national income may not increase living standards everywhere. Income distribution changes over time and varies between countries so makes comparisons difficult.

Question 14

Problems of using GDP to compare standard of living-quality of goods and services

Answer 14

The quality of G/S are much higher than those fifty years ago, but this is not necessarily reflected in the real price of these G/S. Therefore, living standards may have increased more than GDP would suggest since the quality of G/S has improved greatly. Improved technology may allow prices to fall, suggesting falling living standards, when this is not the case.

Question 15

Problems of using GDP to compare standard of living-comparing different currencies

Answer 15

There are issues over which unit should be used to compare figures:they are usually converted to US dollars because of the size of the American economy. Some people argue that purchasing power parity should be used to take into account the impact of differences in the cost of living in different countries.

Question 16

Problems of using GDP to compare standard of living-spending

Answer 16

Some types of expenditure, such as defence, doesn’t 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 in 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 overtime and between countries.

Question 17

Six key factors affecting welfare

Answer 17

Real GDP per capita, health, life expectancy, having someone to count on, perceived freedom to make life choices, freedom from corruption, and generosity.

Question 18

UK national wellbeing

Answer 18

-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.

-there are 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 2012-16, life satisfaction, happiness and worthwhile have continued to rise while anxiety levels fell but have begun to rise slightly. This could be as unemployment is falling/ GDP is rising but concerns over global security could be causing anxiety.

Question 19

Real incomes and subjective happiness

Answer 19

-One key finding of psychological research is that happiness and income are positively related at low incomes (if your poor and your income increases you will be happier), but higher levels of income aren’t associated with increases in happiness ie rich people aren’t necessarily happy and increases in their income won’t necessarily make them happier. This is called the Easterlin Paradox. An increase in consumption of material goods will increase happiness if basic needs aren’t met (shelter and food), but once these needs are met, an increase in consumption won’t increase long term happiness. For example in the Uk as we already enjoy a high standard of living, even if GDP doubles, happiness will not increase.

-Another finding is that income and happiness depends on the people around us. For example, if you are the richest out of everyone you associate with, then you will be happier than someone who has the exact same income but is the poorest out of everyone they associate with. Income is linked to social status and higher social status tends to make us happier.