2.1.1 Economics Growth
❑ Economic growth is defined as the increase in the real value of goods and services
produced as measured by the annual percentage change in GDP (rise in the value of
GDP)
❑ Economic growth is also defined as a LR increase in a country’s productive
capacity/potential national output
❑ GDP measures the quantity of goods and services produced in an economy. In other
words, a rise in economic growth means there has been an increase in national
output.
❑ Economic growth leads to higher living standards and more employment
opportunities.
❑ Real GDP is the value of GDP adjusted for inflation. For example, if the economy
grew by 4% since last year, but inflation was 2%, real economic growth was 2%.
❑ Nominal GDP is the value of GDP without being adjusted for inflation. In the above
example, nominal economic growth is 4%. This is misleading, because it can make
GDP appear higher than it really is.
❑ Total GDP is the combined monetary value of all goods and services produced
within a country’s borders during a specific time period.
❑ GDP per capita is the value of total GDP divided by the population of the country.
Capita is another word for ‘head’, so it essentially measures the average output per
person in an economy. This is useful for comparing the relative performance of
countries. GDP per capita= GDP/ population
Short term causes of rapid real GDP growth can include:
• Expansionary monetary policy including low IR
• Expansionary fiscal policy including tax cuts and increased gov spending and
borrowing
• Favourable exchange rate helping export sales
• Strong growth of asset prices such as poverty and shares
• Expanding employment and rising real incomes
• Improved business confidence driving higher investment
• Increased export sales form an economic boom in countries that are major trading
partners
Long term causes of rapid GDP growth include:
, • Impact of a rise in investment spending on a country’s productive capacity
• Expanding population and growing active labour supply-perhaps due to strong
net inward migration
• Rise in factor productivity such as an increase in GDP per hour worked or GDP
per person employed
• Growth spillovers from invention and innovation
• Growth benefits from increased gov spending on public goods, merit goods and
other essential infrastructure
National income can also be measured by:
Gross National Product (GNP) is the market value of all products produced in an annum
by the labour and property supplied by the citizens of one country. It includes GDP plus
income earned from overseas assets minus income earned by overseas residents. GDP is
within a country’s borders, whilst GNP includes products produced by citizens of a country,
whether inside the border or not.
Gross National Income (GNI) is the sum of value added by all producers who reside in a
nation, plus product taxes (subtract subsidies) not included in the value of output, plus
receipts of primary income from abroad (this is the compensation of employees and
property income).
GDP (Gross Domestic Product) is a measure of (national income = national output =
national expenditure) produced in a particular country.
GNP (Gross National Product) = GDP + net property income from abroad. This net income
from abroad includes dividends, interest and profit.
GNI (Gross National Income) = (similar to GNP) includes the value of all goods and
services produced by nationals – whether in the country or not.
GNI= GDP + net factor income
,Purchasing Power Parity (PPP)
• This is a theory that estimates how much the exchange rate needs adjusting so that
an exchange between countries is equivalent, according to each currency’s
purchasing power. For example, if a car cost £15,000 and the exchange rate
between the UK and the US is 1.5 £ per $, then in the US, the car should cost
$10,000. This means both cars cost the same number of US dollars, and the same
number of pounds Sterling.
• This helps to minimise misleading comparisons between countries.
• PPPs measure the total amount of goods and services that a single unit of a
country’s currency can buy in another country.
The limitations of using GDP to compare living standards between
countries over time
• GDP does not give any indication of the distribution of income. Therefore, two
countries with similar GDPs per capita may have different distributions which lead to
different living standards in the country.
• GDP may need to be recalculated in terms of purchasing power, so that it can
account for international price differences. The purchasing power is determined by
the cost of living in each country, and the inflation rate.
• There are also large hidden economies, such as the black market, which are not
accounted for in GDP. This can make GDP comparisons misleading and difficult to
compare.
, • GDP gives no indication of welfare. Other measures, such as the happiness index,
might be used to compare living standards instead or in conjunction with GDP.
National Happiness
Happiness economics attempts to evaluate a wider range of factors affecting well-being,
quality of life and self-reported levels happiness. There are now several measures of
happiness, such as Gross Domestic Happiness. (GDH) Countries such as Bhutan, France
and UK have, to varying degrees, started using ‘happiness indexes’ in measuring economic
performance.
Happiness economics challenges the assumption of neo-classical economics which
traditionally stresses more conventional economic goals, such as economic growth,
employment and income levels.
Measuring happiness and quality of life presents a challenge because of its normative
subjective nature, but supporters argue that taking into account more in-depth factors
affecting the quality of life helps to make economics more relevant to real life.
Measuring Happiness
To measure happiness is not straightforward because it is a subjective measurement.
Measuring happiness usually involves:
• Surveys asking people to report their own happiness levels.
• Including measurable indices which affect broader welfare levels. For example,
including levels of literacy, access to health care, political freedom, quantity of
leisure, income levels and pollution levels.
• Happiness indexes are usually a composite measure of both subjective surveys and
traditional indexes.
Relationship between income and happiness
Neo-classical economic theory assumes that higher income correlates to higher levels of
utility and economic welfare.
At low levels of income, increasing income is generally agreed to increase happiness.
Rising income enables a person to buy goods and services considered essential to the
basics of life – food, shelter, health care and education. Therefore, at low levels of income,
traditional economic theories about the link between income and utility are relatively strong.
