Measures of Economic Performance - Economic Growth Flashcards
Economic growth
Economic growth: increase in the potential output of an economy or in
the real value of goods & services produced, measured by the %
change in real GDP.
Gross domestic product (GDP): measures the value of real output of
the economy over a period of time; a rise in GDP indicates economic
growth.
Nominal GDP: the monetary value of all goods and services produced
in the economy (GDP at current prices).
Real GDP: the nominal value of GDP adjusted for inflation (GDP at
constant prices).
Real GDP per capita: national income per person often used a proxy
measure for the standard of living.
Value v volume: the value of goods and services shows what they are
worth; the volume shows the number that are produced.
Other national income measures
GDP: value of national output produced in an economy
Gross National Product (GNP): GDP + net property income from abroad
Gross National Income (GNI): similar to GNP = final value of income
flowing to a country’s owned factors of production in a given year
GNI = Gross Domestic Product + net income from abroad of
compensation of employees and property income.
GNI could be higher than GDP if there is:
* income from worker remittances,
* income from interest on bonds and savings held overseas
* income from dividends on profits from overseas investment
* overseas aid transfers (inflows) for poorer countries.
(NB: GNI can be lower than GDP if these flows are reversed)
Purchasing Power Parity (PPP)
Purchasing power parity (PPP) is used when assessing relative living
standards between countries. Real GDP needs to be converted into the same
currency for comparison, but the market exchange rate does not reflect
differences in the cost of living/purchasing power of income in the countries.
PPP is calculated by comparing the price of a basket of comparable goods
and services in different countries. PPP measures the total amount of goods
and services that a single unit of a country’s currency can buy in another
country.
Standard of living
Standard of living – a measure of economic welfare and wellbeing. While more
income typically increases the standard of living the relationship is not exact.
Other factors that affect the standard of living include: access to good healthcare,
access to good education and skills, quality of housing, quality of job, access to
good quality public services, quality of environment, a sense of fairness, life
satisfaction, personal freedom, political freedom etc.`
Limitations of using GDP to compare living standards
Economists use real GDP per capita as a proxy/rough guide for the standard of
living
Real – takes inflation into account; per capita – takes population change into
account
BUT real GDP per capita is still an average and it does not effectively take into
account many other factors that influence the standard of living
* the distribution of income
* the value of unpaid work (housework, child care, DIY, voluntary work)
* environmental degradation and depletion/impact on natural capital
* negative externalities of consumption of goods that are bad for us (eg
tobacco, alcohol) and production (eg pollution, congestion)
* shadow market activity/unofficial work
* impact on standard of living of changing working hours/conditions/leisure
time/quality of jobs
* the changing quality of goods/services over time
* impact of technological improvements on the standard of living
GDP data is also not necessarily accurate - difficulties collecting data and
making accurate calculations ; GDP measures looks backwards; GDP data often
needs to be revised; some countries are likely to be have more accurate data
than others.
