Economic Growth

Question 1

What is GDP?

Answer 1

GDP is the value of all goods/services produced in an economy in a one-year period

Question 2

What are the two ways you can measure economic GDP

Answer 2

It can be measured using the following approaches
The expenditure approach: adds up the value of all the expenditure in the economy
This includes consumption, government spending, investment by firms and net exports (exports - imports)
The income approach: adds up the rewards for the factors of production used
Wages from labour, rent from land, interest from capital and profit from entrepreneurship

Question 3

Why is the value of GDP different to the volume of GDP?

Answer 3

The value of GDP is different to the volume of GDP
The value is the monetary worth
The volume is the physical number

Question 4

What is nominal GDP?

Answer 4

Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period
There has been no adjustment to the amount based on the increase in general price levels (inflation)

Question 5

What is real GDP?

Answer 5

Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn

Question 6

What is GDP per capita and how do you calculate it?

Answer 6

GDP per capita = GDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries:
For example, Switzerland has a much higher GDP/capita than Burundi

Question 7

Why is GDP not the best metric to measure the countries, output or wealth?

Answer 7

GDP measures the value of production within a country’s borders
It does not consider the income earned by its citizens while operating outside of the country

Question 8

What is GNI?

Answer 8

Gross national income (GNI) measures the income earned by citizens operating outside of the country + the GDP
Many citizens employ their resources outside of a country’s borders - and then send the income home

Question 9

What is GNP?

Answer 9

Gross national product (GNP) takes it one step further
GDP + income from abroad - income sent by non-residents to their home countries

Question 10

Why are national income statistics useful?

Answer 10

National income statistics are useful for making comparisons between countries
They provide insights on the effectiveness of government policies
They allow judgments to be made about the relative wealth and standard of living within each country
They allow comparisons to be made over the same or different time periods
For example, the growth of the Asian Economies in the last 15 years can be compared to the growth of the European Economies in the 1990s

Question 11

Why is using real GDP a better comparison, the nominal GDP

Answer 11

Using real GDP is a better comparison than nominal GDP
One country may have a much higher rate of economic growth, but also a much higher rate of inflation. Real GDP provides a better comparison

Question 12

Why is using real GDP per capita better than using real GDP?

Answer 12

Using real GDP/Capita provides better information than real GDP as it takes population differences into account

Question 13

Why is using real jam per capita better than using GDP per capita

Answer 13

Using real GNI/capita is a more realistic metric for analysing the income available per person than GDP/capita

Using real GNP/capita provides information on the income that is actually within a country’s borders
This value can be significantly different from GDP/Capita

Question 14

What is purchasing power parities?

Answer 14

Purchasing power parity (PPP) is a conversion factor that can be applied to GDP, GNI and GNP
It calculates the relative purchasing power of different currencies
It shows the number of units of a country’s currency that are required to buy a product in the local economy, as $1 would buy of the same product in the USA

Question 15

What is the name of PPP?

Answer 15

The aim of PPP is to help make a more accurate standard of living comparison between countries where goods/services cost different amounts

Question 16

Limitations of using GDP to compare living standards between countries and overtime

Answer 16

Lack of information provided
on inequality
The distribution of income in an economy is provided as an average (GDP/capita)
The differences in the standard of living within the same country can be significant

Quality of goods/services
GDP provides no information on the increase/decrease in the quality of goods/services over time
If quality worsens but prices are lower, then the standard of living is judged to have increased
The poor quality may actually have decreased the standard of living

Does not include unpaid/voluntary work
If it included voluntary/unpaid work, then GDP/capita would be higher
E.g. some economies have a high amount of family child care provision. This increases standards of living but is not recorded in any way

Differences in hours worked
GDP data does not capture the amount of time taken to produce the GDP/capita
In one country, where it takes less time to generate the income than in a similar country, the standard of living would actually be higher

Environmental factors
GDP does not capture the environmental and health impacts of generating the income within a country (externalities)
In one country, where there are fewer externalities in generating the income the standard of living would be higher