Economic Growth
Gross Domestic Product (GDP)
- National income accounting measures the economic activity within a country and provides insights into how a country is performing
- One of the main methods to determine economic activity is to measure the rate of change of output in an economy
- The output of an economy is called gross domestic product (GDP)
- GDP is the value of all goods/services produced in an economy in a one-year period
- It can be measured using the following approaches
- The expenditure approach: adds up the value of all the expenditure in the economy
- This includes consumption, government spending, investment by firms and net exports (exports - imports)
- The income approach: adds up the rewards for the factors of production used
- Wages from labour, rent from land, interest from capital and profit from entrepreneurship
- The expenditure approach: adds up the value of all the expenditure in the economy
- Both approaches should provide the same figure as one party's expenditure is another party's income
- The value of GDP is different to the volume of GDP
- The value is the monetary worth
- The volume is the physical number
The Distinction Between Real, Nominal & Per Capita GDP
- In economics, the use of the word nominal refers to the fact that the metric has not been adjusted for inflation
- Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period
- There has been no adjustment to the amount based on the increase in general price levels (inflation)
- Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
- For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
- GDP per capita = GDP / the population
- It shows the mean wealth of each citizen in a country
- This makes it easier to compare standards of living between countries:
- For example, Switzerland has a much higher GDP/capita than Burundi
Exam Tip
When an exam question uses the phrase 'at constant prices' it is referring to real GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at constant prices'. This requires you to define real GDP and then explain the rise.
Gross National Income
- GDP may not be the best metric to measure a country's output or wealth
- GDP measures the value of production within a country's borders
- It does not consider the income earned by its citizens while operating outside of the country
- Gross national income (GNI) measures the income earned by citizens operating outside of the country + the GDP
- Many citizens employ their resources outside of a country's borders - and then send the income home
- Gross national product (GNP) takes it one step further
- GDP + income from abroad - income sent by non-residents to their home countries
- GNP/capita provides a much more realistic view of a country's wealth than GDP/capita
Growth Comparisons Between Countries
- National income statistics are useful for making comparisons between countries
- They provide insights on the effectiveness of government policies
- They allow judgments to be made about the relative wealth and standard of living within each country
- They allow comparisons to be made over the same or different time periods
- For example, the growth of the Asian Economies in the last 15 years can be compared to the growth of the European Economies in the 1990s
- Using real GDP is a better comparison than nominal GDP
- One country may have a much higher rate of economic growth, but also a much higher rate of inflation. Real GDP provides a better comparison
- Using real GDP/Capita provides better information than real GDP as it takes population differences into account
- Using real GNI/capita is a more realistic metric for analysing the income available per person than GDP/capita
- Using real GNP/capita provides information on the income that is actually within a country's borders
- This value can be significantly different from GDP/Capita
Exam Tip
When studying national income data that has been provided for data response questions, you will often see a generalised pattern emerge
- Developed countries will have a smaller gap between their GNP and GDP
- Developing countries often have a higher GDP than GNP - as much as 6%
The reason for this is usually linked to multinational companies involved in resource extraction, who then send income/profits home
Purchasing Power Parities (PPP)
- Purchasing power parity (PPP) is a conversion factor that can be applied to GDP, GNI and GNP
- It calculates the relative purchasing power of different currencies
- It shows the number of units of a country's currency that are required to buy a product in the local economy, as $1 would buy of the same product in the USA
- The aim of PPP is to help make a more accurate standard of living comparison between countries where goods/services cost different amounts
- If a basket of goods cost $150 in Vietnam (once the currency has been converted) and the same basket of goods cost $450 in the USA, the purchasing power parity would be 1:3
- It seems like the cost of living is much higher in the USA
- However, if the USA GNP/capita is more than three times higher than the GNP/capita of Vietnam, it could be argued the USA has better standards of living
- Conversely, if the GNP/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services
Limitations of Using GDP for Comparisons
A Table Which Explains the Limitations of Using GDP Data to Compare Living Standards Between Countries & Over Time
Lack of information provided on inequality |
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Quality of goods/services |
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Does not include unpaid/voluntary work |
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Differences in hours worked |
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Environmental factors |
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National Happiness
- National happiness and societal well-being are measured in the UK by the Office for National Statistics (ONS)
- While GDP focusses on production, happiness focuses on health, relationships, the environment, education, satisfaction at work and living conditions
- National incomes statistics tend to present more positive data while national happiness surveys yield more normative data
- There is a link between income and happiness and the Easterlin Paradox is often used to explain it
- Happiness and increases in income have a direct relationship up to a point
- Beyond that point, the relationship is less evident
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