Introduction/measuring GDP & Economic growth Flashcards
macroeconomics definition
branch of economics that studies individual national economies and/or the global economy
the major macroeconomic issues
- Economic growth- expand our prosperity over time. EG= great determinant of our happiness
- Unemployment
- Inflation- current main problem (persistent inc in prices)= problems in every aspect of out lives ideally= inflation no higher than 2%
government macroeconomic policy
- government has control over these measures:
- controlling various intermediate variables (interest rates, money supply, taxes, government expenditure etc.)
- These variables can themselves directly affect businesses as well as the environment in which they operate
macroeconomic policy challenges- Five widely agreed policy challenges for macroeconomics are to:
- Boost economic growth
- Keep inflation low (currently at 5%)
- Stabilise the business cycle- avoid recession periods
- Reduce unemployment
- Reduce government and international deficits
GDP Definition
market value of all final goods and services produced in a country in a given time period.
This definition has 4 parts:
- Market value: something traded in the market
- Final goods and services: what we are selling as a final G/S
- Produced within a country: domestic products (e.g. GPD of UK over a given time period)
- In a given time period
GDP NOMINAL v Real
- Nominal GDP is the value of goods and services produced during a given year valued at the prices that prevailed in that same year.
- An increase in nominal GDP can be due to economic growth or due to increase in prices (inflation).
GDP nominal v REAL
- GDP in constant prices
- Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year.
- For example, if we choose the reference base year to be 2019 then we describe real GDP as measured in 2019 pounds.
- It controls for change in prices and hence shows real changes in GDP.
- to account for inflation (e.g. value of £100 worth less in 2023 that in was in 2000) we must use deflation
- more meaningful- extract a real GDP from nominal GDP
Real GDP: limitations & 2 main purposes
limitations:
- GDP misses out factors that influence our wellbeing
- GDP fails to include: household production, volunteering, environmental quality, health and life expectancy, education and literacy… BUT provides a a quick overview of the economic capacity.
- To compare the standard of living over time
- formula: Real GDP per capita / population
- The value of G&S that the average person can enjoy while removing the influence of changing prices and cost of living.
- e.g. comparing real GDP per capita over time as a ratio of some reference year: in 1965, real GDP per capita was £10,855 and in 2015, it was £28,156, so real GDP per person in 2015 was 2.6 times its 1965 level.
- To compare the standard of living across countries
Real GDP: Uses- Two features of our expanding living standards are:
> The growth of potential GDP per person
Fluctuations of real GDP around potential GDP
The value of production when all the economy’s labour, capital, land and entrepreneurial ability are fully employed is called potential GDP.
potential GDP: GDP that we can have if we evolve all 4 factors of production (labour, capital, land, entrepreneurship)
Real GDP: Uses
> Potential GDP grows at a steady pace because
the quantities of the factors of production and their productivity grow at a steady pace.
> real GDP fluctuates around potential GDP
> Real GDP per person in the UK:
Doubled between 1965 and 1998.
Was 2.6 times its 1965 level in 2015.
> real GDP fluctuations:
- the business cycle: a periodic but irregular up-and-down movement of total production and other measures of economic activity.
Every cycle has two phases:
- EXPANSION: a period during which real GDP increases from a trough to a peak.
- RECESSION: period during which real GDP decreases its growth rate is negative for at least
two successive quarters.
and two turning points:
- Peak
- Trough
real GDP: 2 main purposes
- To compare the standard of living over time
- To compare the standard of living across countries
Two problems arise in using real GDP to compare living standards across countries:
- The real GDP of one country must be converted into the same currency units as the real GDP of the other country.
- The goods and services in both countries must be valued at the same prices.
initial paradox
there is a positive association between income and happiness within a country at a specific time
however…
this association breaks down: between countries, over time within the same country
GDP at PPP (purchasing power parity)
- prices of particular products in one country may be much less or much more than in the other country, i.e. the exchange rate may be a poor indicator of the purchasing power of the currency at home.
- The idea behind PPP: Exchange rate between two currencies is equal to the ratio of the currencies’ respective purchasing power.
The PPP exchange-rate calculation is controversial because of the difficulties of finding comparablebaskets of goodsto compare purchasing power across countries.
Easterlin Paradox and Policy Implications
- measure of happiness and real income per capita
“any effort to satisfy mankind is bound to be self-defeating. Any satisfied desire creates an unsatisfied one”
Homans, 1961
“the growth process itself engenders ever-growing wants that lead it ever onwards”
Easterlin, 1973
If economic growth does little to improve social welfare over time, then should growth be the primary goal of government economic policy?
