Edexcel A Level Economics A:复习笔记2.1.1 Economic Growth

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
  • 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
  • The distribution of income in an economy is provided as an average (GDP/capita)
  • The differences in the standard of living within the same country can be significant
Quality of goods/services
  • GDP provides no information on the increase/decrease in the quality of goods/services over time
  • If quality worsens but prices are lower, then the standard of living is judged to have increased
  • The poor quality may actually have decreased the standard of living
Does not include unpaid/voluntary work
  • If it included voluntary/unpaid work, then GDP/capita would be higher
  • E.g. some economies have a high amount of family child care provision. This increases standards of living but is not recorded in any way
Differences in hours worked
  • GDP data does not capture the amount of time taken to produce the GDP/capita
  • In one country, where it takes less time to generate the income than in a similar country, the standard of living would actually be higher
Environmental factors
  • GDP does not capture the environmental and health impacts of generating the income within a country (externalities)
  • In one country, where there are fewer externalities in generating the income the standard of living would be higher

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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