Economics - 2.1.1 - Economic Growth - A Level

GNP characteristics

- Counts output owned by an economy's citizens - Focus on ownership of output

GDP characteristics

- Counts output within an economy's borders - Geographical in focus - Arguably tells us more about the welfare of a given society's citizens than the other metrics

Problems with comparing National Incomes between countries

- Differing methods in measuring quantities - Problems with acquiring statistics - Different populations - Quality of goods and services - Irrelevant goods and services - Externalities - Income Distribution - Geographical location - Population density - Market exchange rates

Problems with comparing National Incomes in Time

- Population Change - Inflation - Income distribution - Externalities - Quality of Goods and Services - Accuracy of statistics - Irrelevant goods and services

Why measure National Income?

- To study how the economy is working, in order to better understand and predict it. - To make predictions about the future performance of the economy, and therefore allow governments to make better decisions about what to do now. - To compare economies, both for different countries, and at different times. - To approximate changes in the standard of living.

Things not counted in GDP

2nd hand products etc., illegal activities e.g. drugs

What can generally be assumed from an increase in GDP

A simplistic assumption would be if GDP is growing, then Standards of Living are growing/increasing.

Real

Adjusted for inflation - i.e. measured using the value of money at one particular point in time

Problems with comparing National Incomes between countries: Different populations

Countries have different population, therefore GDP doesn't reflect standards of living per person; therefore, GDP should be measured per capita to adjust.

Gross National Income (GNI)

An economy's GDP plus net overseas interest payments and dividends (intended to measure factor incomes)

Purchasing Power Parity (PPP)

An exchange rate which expresses the value of one currency in terms of another on the basis of how much of each currency is needed to buy the same basket of goods and services in each currency

'Total Output'

Another name for GDP

'Actual growth'

Another name for short-run economic growth

Problems with comparing National Incomes between countries: Problems with acquiring statistics

Countries may find it more difficult to get accurate statistics: for example, if one country has a larger black market.

GNI characteristics

Counts output of GDP along with factor incomes from across the globe

Problems with comparing National Incomes between countries: Differing methods in measuring quantities

Different countries may not measure the same quantities, and in the same way, leading to equivalent scenarios giving different figures. One reason for this may be if a country is very poor, it may not bother collecting statistics.

Economic growth indicates

Economic Growth technically means that standards of living are increasing because quantity of goods and services is increasing (more wants and needs are being met) if the economy is growing

Most commonly used factor to gauge 'Economic Growth'

GDP (use)

Unit of GDP

GDP measured in monetary (£) terms in order to apply a common unit (unit of account) to valuing production by society. This distinguishes from an idea of measuring volume of production, instead measuring the value of that production to an economy.

Total GDP

GDP overall across a country, not accounting for its population

Relation between happiness and economic welfare

Generally happiness and growth are correlated, but often not directly proportionaly

Problems with comparing National Incomes in Time: Accuracy of statistics

Governments have agendas, and may be incompetent; presented figures may be misleading or wrong. Therefore, how national income statistics are put together should be kept in mind.

the Easterlin paradox

Hypothesis that increased GDP of a country does not neccesarily correlate with happiness reported by citizens of that country

Population growth vs GDP

If population growth is greater than GDP growth, then GDP per capita is going to fall.

Problems with comparing National Incomes between countries: Income Distribution

Income distributions differ between countries. For example, low income earners are likely to be better off in Denmark or Sweden might be better off than in the USA, which has higher GDP per capita.

Problems with comparing National Incomes in Time: Inflation

Inflation distorts the figure, including change which is irrelevant to standards of living. Therefore, national income should be measured in real terms.

Why we use GDP

It is an indication of how much of things that we need and want to consume that the economy is producing in a given period of time i.e. it is an indicator of Standards of Living in an economy.

Value vs volume of GDP

Measuring amount of G&S produced could be reported in volume terms (e.g. no. of pins vs no. of cars manufactured). However, the extent to which different products satisfy wants and needs varies wildly, and there are no common units enabling us to compare different no. of different types of products. Monetary value of GDP applies one common unit ("unit of account") to measuring the amount of production satisfying wants and needs.

Calculating value of GDP from volume

Multiply volume by the price level

Problems with comparing National Incomes in Time: Externalities

National income does not take into account externalities (unpriced goods and services), such as pollution. This means pollution is more likely to be ignored.

Problems with comparing National Incomes in Time: Population Change

National income does not take into account the size of the population, and this can distort figures or make them inaccurate. For example, if population doubles, and national income quadruples, people are (likely) only going to be twice as well off instead of four times. Therefore, national income should be measured per capita.

Problems with comparing National Incomes between countries: Externalities

National income statistics take no account of externalities created by different economies, which may cause things like pollution to be ignored.

Nominal

Not adjusted for inflation - i.e. measured using the value of money at the time the measurement is taken

PPP in terms of comparisons of countries

PPP gives us an alternative exchange rate to use to restate one country/economy's GDP in terms of another on the basis of each currency's ability to buy the same PPP gives us an alternative exchange rate basket of goods and services.

Transfer Payments

Payments excluded from final calculations of national income. Includes: benefits, pocket money, selling a second hand car. These are payments that produce not corresponding output in the economy.

Total vs per capita GDP

Population of society changes over time (usually the population grows through procreation and immigration). Therefore we can use GDP per capita to compare living standards and other factors across different economies (e.g. China and US have similar GDPs but China has a far greater population)

Problems with comparing National Incomes in Time: Quality of Goods and Services

Problems may arise if Goods and Services rise in quality over time but fall in price (e.g. cars are cheaper than they were 80 years ago). This would appear that there has been a decrease in national income due to a fall in price, and thus it would appear as a fall in the standards of living. Increased pay would also appear to be a rise in the national income (real and nominal), even if no new Goods and Services would be produced.

Problems with comparing National Incomes between countries: Quality of goods and services

Quality of goods and services able to purchased for the same quantity of money (even adjusted with PPP). Therefore, some populations will have higher standards of living for the same national income per capita.

Problems with comparing National Incomes in Time: Income distribution

Since national income measures changes in the whole economy, it can be misleading about changes in standards of living for normal citizens in the economy; if, for example, income inequality is increasing instead. Therefore, income distribution should be viewed with national income data.

Problems with comparing National Incomes in Time: Irrelevant goods and services

Some goods and services, such as defence spending, may not increase standards of living, and therefore distort national income as a measure of it.

Problems with comparing National Incomes between countries: Irrelevant goods and services

Some governments spend more money on goods and services which do not increase standards of living, such as the the US and the military. This may make it seem like their population has a higher standard of living than they do. This sort of spending should be kept in mind.

Argument for using happiness instead of growth

Some think that the government should ignore GDP, but instead focus on ensuring that basic needs are met, and how to increase happiness (exempli gratia by decreasing working hours, and increasing citizens' social skills).

Long-run economic growth

The change in an economy's potential economic output over time resulting from changes in the quantity and quality of the economy's factors of production. It cannot be measured, but is based on estimates of potential economic output.

Short-run economic growth

The change in the actual value of GDP measured in an economy in one period of time compared to another. It is the measured change in the level of economic activity which is a key focus for economic policy-makers and the media.

Use of the GDP/GNP concept

The main use is to help understand Standards of Living in developing economies and the extent to which those economies are truly benefitting from investment by multinational corporations (MNCs).

Potential economic output

The maximum total output that can be produced by an economy in a given period of time when all factors of production are utilised to their maintainable maximum capacity

Standards of Living (SoL)

The quality of life enjoyed by people. This comprises material aspects (i.e. how much people are getting of the things they want and need), and non-material aspects (i.e. how healthy, educated, and happy they are)

Microeconomics

The study of individuals, markets, firms and industries. Focuses on the details of small-scale components within the economy.

Macroeconomics

The study of whole economic systems: national economies and the global economy. Looks at the whole economy on a large scale.

Gross National Product (GNP)

The total value of all finished goods and services produced (whether within the borders of the economy, or overseas) using the factors of production owned by the citizens of an economy

GDP

The value of all final goods and services produced within a country's border in a specific period of time, usually a year. (And thus a measure of the total amount of economic activity that occurs within the economy)

Problems with comparing National Incomes between countries: Market exchange rates

These do not reflect purchasing power. So simple comparisons using market exchange rates may give a distorted picture of living standards between countries. We can use purchasing power parities to avoid this.

Problems with comparing National Incomes between countries: Geographical location

This can distort comparisons. For example, if country A has higher fuel bills than country B, it may appear that country A spends more of their income, and this would seem to indicate a higher standard of living.

Problems with comparing National Incomes between countries: Population density

This may also distort figures. For example, if country A had a smaller size than country B, but they had equal population size, country A might have to spend less on road maintenance, and it would seem that they would have a higher standard of living.

GDP per capita

Total GDP divided by number of people in population to account for population growth

Complications of comparing GDP across countries

Using GDP to compare Standards of Living from one country to another is complicated by different currencies and different populations.

Complications of comparing GDP over time

Using GDP to compare Standards of Living from one time to another is complicated by inflation and population change.

Real vs Nominal GDP

We adjust nominal GDP for inflation to get real GDP to give a more accurate picture of how production in current time period compares to the past (comparing GDP over time).

Comparing rates of growth over time and across countries

We can use real GDP per capita to compare over time, as inflation and population change will otherwise have major effects on the calculated value. Comparing across countries is further complicated by currency conversions, so we must factor these out.