Measuring economic growth

Question 1

What are the four main Macroeconomic indicators?

Answer 1

1. the rate of economic growth
2. the rate of inflation
3. the level of unemployment
4. the state of the balance of payments
   - measure countrys economic performance
   - monitor how the economy is going

Question 2

What is GDP?

Answer 2

• GDP is a measure of economic growth
• Economic growth = change in national output over a period of time
  output can be measured in two ways: 1. Volume (quantity of goods and services produced in 1 yr) 2. Value (calculating value of all goods and services produced in 1 year
• national output usually measured by value this = Gross Domestic Product (GDP)
• also calculated by total national expediture (AD) in a year, or by adding up total amount of national income earned in a yr.
  NATIONAL OUTPUT = NATIONAL EXPENDITURE = NATIONAL INCOME (circular flow of income)

Question 3

Economic growth measured as a percentage

Answer 3

Economic growth is usually measured as a percentage
- the rate of economic growth = speed at which the national output grows over a period of time.
- long periods of high economic growth = booms
negative economic growth for two consecutive quarters = recession
- long recession = slump
- economic depression = sustained economic downturn lasts for a long period of time

Question 4

Measuring economic growth

Answer 4

over one year a country’s GDP may increase or decrease -> change can be shown as a value or percentage.
Formula = change in GDP (£billions)/ Original GDP (£billions) x 100 = percentage change
- Some GDP growth may be due to price inflation, if this is not accounted for = Nominal GDP - misleading figure as its higher than actually is.
- Economists remove inflation to fine Real GDP.

Question 5

GDP per capita can indicate the standard of living

Answer 5

total GDP/ population size = GDP per capita (national output per person)
- higher GDP per capita = higher standard of living

GNI and GNP:
- GNI = GDP plus net income from abroad - earned by a country on investments andother assets owned abroad, minus any income earned by foreigners on investments domestically.
- GNP = similar to GNI - total output of the citizens, whether or not they’re resident in that country
these can also be shown by comparing living standards between different countries. calculated in similar way to GDP per capita - dividing total GNI or GNP by total country popln.

Question 6

Purchasing Power Parity is used in comparisons of living standards

Answer 6

• When using GDP per capita to compare living standards on countries that use differnet currencies, the exchange rate might not reflect what is the true worth of the two currencies - so comparing GDP per capita => might not reflect accurate picture.
• To overcome this problem comparison carried out using PURCHASING POWER PARITY
• Purchasing power = real value of amount of money in terms of what you can actually buy with it. In less developed countries can buy more goods than in more developed countries e.g. Canada.
• Using PPP in comparisons of countries living standards involves adjusting GDP per capita figures to take into account the differences in purchasing power in those countries - results usually shown in US dollars - more accurate & easier to compare.

Question 7

Using GDP to make comparisons has Limitations

Answer 7

1. GDP and GDP per capita used to compare economic performance and standards of living in different countries:
   - high GDP - economic performance strong
   - high GDP per capita - high standard of living
2. Using the GDP and GDP per capita figures might not take into account:
   - extent of hidden economy (economic activity that doesnt appear in official figures)
   - public spending = some governments provide more benefits e.g. unemployment benefits or free healthcare, some countries spend much more per person to increase SoL.
   - the extent of income equality = similar GDP but unequal distribution in one country
   - other = number of hours workers have to work per wk, working conditions, level of damage to environment, different spending needs.

Question 8

Index numbers represent percentage changes

Answer 8

Index numbers useful for comparisons over time. first year = base year and the index number for this year = 100. changes up or down are expressed by numbers above or below 100. e.g. 3% rise in real GDP over 1 year => index rose to 103 in year 2
- An index number of 108 in year 4 means an 8% rise from base year.