How do we measure economic performance?

2.1 Unit content Four topics: Economic growth (see topic 2.5) Inflation Employment and unemployment Balance of payments

2.1.1 Economic growth - syllabus Students should be able to: Explain the rates of change of real GDP as a measure of economic growth Distinguish between real & nominal; total & per capita; value & volume Define other national income measures (GNP, GNI) Compare rates of growth between countries and over time Analyze and use PPPs and PPP adjusted figures Assess the limitations of using GDP Discuss national happiness

Macroeconomics definitions Macroeconomics considers the economy as a whole – the total quantities of goods and services produced by all firms in the economy Total demand is called a_________ d_________ and total supply is a____________ supply World’s largest economies v 2015 v 2020

Developed countries Developed countries are _________________ countries (also known as first world countries). E.g.

Developing countries Developing countries are defined according to their Gross National Income (GNI) per capita per year. Usu ally they have a GNI of below US$ Most are situated in the southern hemisphere. They were sometimes called third world countries. E.g. A developing country is one in which the majority lives on far less money, with far fewer basic public services, than the population in highly industrialized countries

Economic growth – simple definition and calculation Economic growth refers to the capacity of an economy to produce more over time What will happen to the size of a very small economy which is currently worth £1000 if it grows by 2.5% a year? If it continues to grow by 2.5% for a second year?

Economic growth – more calculations What will happen to the size of the small £1000 economy if it grows by 2.5% a year for 30 years? When will it double?

Economic growth and GDP Economic growth is measured by the rate of change of GDP (gross domestic product). GDP is the total value of g_______ and s_______ produced in the economy. This is a standard United Nations measure. E.g. growth of 2.5% in GDP in a year means that the output of the economy has ____________ by _____ over _____ months. Economic growth can also be measured by the annual change in real national income.

Reliability of GDP figures The figures are based on a huge survey of businesses and government departments complied by the ONS. The first figures for any quarter are known as the "flash estimate" as they are based on incomplete data. The figures are revised at least twice as more information is collected NOTE: an economy is generally considered to be in recession if it has contracted for _____ consecutive quarters

Edexcel definitions of measure of total economic production Economists refer to several measures of total economic production for individual countries, including Gross D_________ Product (GDP) and Gross N_________ Product (GNP). Another measure seen increasingly is Gross National I____________ (GNI), essentially an augmented version of GDP.

Edexcel definitions of GDP, GNI and GNP GDP is the total market value of all goods and services produced in the country in a given year. GDP does not include earnings by its residents while outside of the country. GNI is GDP plus income paid into the country by other countries for such things as interest and dividends. GNP is the total market value of all goods and services produced by domestic residents (GDP) plus income that residents have received from abroad, minus income claimed by non-residents.

GNI ONS definition: Gross national income (GNI) or, as it was previously known, gross national product (GNP), describes the total primary income received by residents of a country and links the economic activity (GDP) with the destination of the income so generated. For example, if a UK company owns a factory abroad, that factory’s output counts towards UK GNI but not GDP.

Economic growth GDP is measured as a percentage and the trend rate for the UK is ____% per year The underlying long term trend rate of economic growth just means the rate that can be maintained in the long term The latest figures are that the UK economy grew by ___% in the 3 rd quarter of 2015 (July to September) (i.e. between quarter 2 and quarter 3). This is the ___ consecutive quarter of GDP growth.

Nominal and real economic growth What is the difference between nominal and real GDP? Real figures are figures adjusted for ________ whereas nominal figures are figures not adjusted for __________ If the nominal GDP growth rate was 10% last year and inflation was 7% then the percentage change in real GDP would be ____%

Total versus per capita GDP What is the difference between total and per capita GDP? Total GDP is Per capita GDP is If the nominal GDP growth rate was 10% last year, inflation was 7% and population growth was 3% then the approximate percentage change in real GDP per capita would be

Volume versus value GDP What is the difference between volume and value GDP? Volume GDP is the total ________ produced in an economy Value GDP is calculated by:

Falling GDP? What does it mean if an economy was growing by 10% and its growth rate had now fallen to 2%? If an economy is shrinking then its GDP would be?

Why is economic growth inadequate as a measure of standard of living?

What are the problems of comparing GDP between developed and developing countries? Reasons as on previous slide plus:

Comparing GDP across countries GDP for different countries is usually measured in a common currency – normally the US dollar. But there are two problems in using exchange rates: 1. Exchange rates can be volatile from month to month. A large depreciation in the value of the Argentinean peso against the US dollar might imply that Argentinean living standards have fallen even though their economy might actually be ________ quickly

Comparing GDP across countries The second problem is: 2. Exchange rates are more relevant to products that are traded between countries rather than non- traded products, why? Non-traded service such as domestic cleaners, haircuts and academic tutors tend to have bigger differences in prices.

What are PPPs? Purchasing power parities try to compare the value of money in different countries To make a PPP adjustment for comparing GDP we build a basket of comparable goods and services and look at the prices of that basket in different countries. Purchasing Power Parity is the exchange rate needed for say $100 to buy the same quantity of products in each country. PPP figures are adjusted for differences in the cost of living between countries.

Edexcel comments The standard of living does not just refer to income but also to the q______ of l______ and e__________ w__________

National happiness In response to these issues, there has been a move towards measuring National Happiness, rather than just focusing on economic variables. In the UK, the ONS measures National Well-being. Within the area of happiness economics there has been much debate about the 'Easterlin paradox', what is this?

National happiness and income There is evidence to suggest a positive correlation between relative income and happiness. Those with above average incomes tend to have higher levels of happiness. Why?