Growth Flashcards
Describe 2 difficulties of measuring Nominal GDP per capita to compare different countries.
1) It is usually measured in different currencies. Difficult to compare nominal GDP data as exchange rates are very volatile.
2) Nominal GDP does not reflect the changes in price levels. Difficult to compare as there is no way of knowing what each currency is worth in terms of goods and services that can be bought
Define PPP
Purchasing Power Parity between 2 countries tells us how much of 1 currency is needed to buy a basket of goods compared to another currency.
What is easterlin paradox
As the average income rises, marginal happiness decreases
Limitations of Real GDP to measure living standards (5)
It ignores:
1) Population changes
2) Income distribution
3) Types of goods and services
4) Underground economies
5) Subsistence economies
Describe potential and actual economic growth and how it is shown on the diagram?
Potential economic growth is when there is an increase in the quality or quantity of factors of production which shifts the LRAS to the right, thereby increasing the productive potential and the full employment level of output.
Actual economic growth is when there is an actual increase in real GDP. Can be shown by SRAS, AD or even in some cases (when economy is at bottleneck or full employment) LRAS shift to the right.
What does a PPF show?
All the possible combinations of two goods that can be produced when an economy is using all resources efficiently.
How to show actual economic growth on PPF
A shift from a point inside of the PPF where resources are not being efficiently used in an economy to a point on the PPF where resources are.
A movement towards the PPF
How to show potential economic growth on PPF
An outward shift of the PPF which shows there is an increase in the PRODUCTIVE POTENTIAL of the economy due to a higher quantity or quality of factors of production increasing the firm’s productivity
