Economic Growth

Key terms:

• Economic Growth – an increase in the productive potential in an economy typically measured by the change in real GDP.
  
  
• Gross Domestic Product (GDP) – the monetary value of all goods and services produced within a country’s borders.
  
  
• Gross National Income – The value of the GDP adjusted to reflect income received from abroad.
  
  
• Purchasing Power Parity – a technique used to determine the relative value of different currencies by comparing countries.
  
  

Types of GDP:

• Real and nominal GDP:
  
  

1. Nominal – the figure at that moment in time
2. Real – shows the figure adjusted for price changes (e.g. inflation)
   
   

• Total and per capita GDP:
  
  

1. Total – full value of the GDP
2. Per capita –shows the value per citizen
   
   

• Value and volume GDP:
  
  

1. Value – considers the monetary value of what has been produced in an economy
2. Volume –considers the physical quantity of goods and services produced

Comparing economic growth:

• Purchasing Power Parity:

Comparing countries is difficult because different countries have different currencies, so you cannot directly compare the value of goods and services between countries. Also, the value of goods in countries is often determined by the wages and overall buying power so it is not appropriate to compare like for like.
By using purchasing power parities, different currencies can be compared across various countries. The technique involves by comparing the value of a set basket of goods in different currencies using a base currency (e.g. US dollar) and an exchange rate. An example is the Big Mac Index which compares the price of a Big Mac in different countries by converting all currencies to the US dollar using exchange rates.


Limitations of GDP in comparing living standards between countries over time:

• GDP doesn’t account for the improving quality of goods over time (especially technological goods).
  
  
• The GDP figure doesn’t include unpaid or unofficial work such as washing your own car or the childcare of your own child. The value of the goods and services consumed by the producers is also excluded.
  
  
• The increase in real GDP may be shared unequally amongst the economy’s population so the GDP per capita figure may mask huge inequalities within the economy.
  
  
• An increase in GDP may lead to other problems: increased pollution, increased number of working hours, increased stress levels, etc. These can all lead to a worse standard of living.
  
  

National Happiness
In the UK, the Office for National Statistics measures the national wellbeing of the population in order to assess the quality of life within the economy. An increase in real incomes is often linked to an increase in subjective happiness.


Limitations of happiness measurements:

1. Very difficult to measure
2. Happiness can change quickly
3. Happiness is often subjective