Economic Growth Growth in National Income

Economic growth – growth in national income Economic growth means an increase in national income – the economy is bigger An increase in national income means more goods and services are consumed, so should be an increase in living standards The measure used by most countries is Gross Domestic Product (GDP) GDP measures the total market value of all goods and services produced by a country in a given period of time So growth in Q meant GDP grew by 0.7% in the UK Remember from the circular flow of income that income is identical to output which is identical to expenditure, so we do have different ways to measure it

GDP – volume or value? GDP can be measured in nominal or real terms. What does this mean? Nominal GDP measures GDP based on the price at the time the good is produced/sold The value of goods and services produced is calculated by price x quantity for all final goods So if the volume of goods produced does not change over 2 years, but the average price rises by 10%, nominal GDP increases by 10% But we are really interested in whether more goods and services are produced Real GDP strips out the impact of inflation by measuring GDP as if prices have not changed. So the 0.7% increase in Q was an increase in real GDP If Nominal GDP grows by 5% and inflation is 2% then real growth is 3%

Total and per capita If GDP grew by 0.7%, does this mean living standards have increased? If the US economy is about 6 times larger than the UK, does this mean US citizens are better off? Need to adjust for size of population GDP means GDP per person, so is GDP/population

What is measured GDP measures the total market value of all goods and services produced However, this should be of final goods If I buy some potatoes from a farmer for £500 and produce lots of packets of crisps for £5,000 and sell these to a supermarket which then sells these for £7,000 then GDP is £7,000 not £500 + £5,000 +£7,000 It is only measured when spending is on new goods and services, it when a good is produced So measuring income it excludes any transfers, such as government payments of pensions, since the recipient does not produce anything It excludes sales of second hand goods (cars, old houses)

Other measures There are many (sadly) Measuring the activities in an economy is complex, but takes into account the participants in an economy (the who), and their transactions with each other (the what) Gross National Income This is GDP plus net factor income from overseas This means wages, rent, interest and profits earned by UK residents overseas minus wages rent interest and profits earned in the UK by foreign residents Gross National Product Similar, but measures the total value of goods and services produced by the labour and property supplied by a country’s residents!

Put the top 10 in order of Size Australia Brazil China Canada France Germany India Indonesia Italy Japan Netherlands Poland Russia Saudi Arabia South Korea Spain Sweden Switzerland Thailand Turkey United Kingdom United States CountrySize ($billion, 2015) United States18,125 China11,212 Japan4,210 Germany3,414 United Kingdom2,853 France2,470 India2,308 Brazil1,904 Italy1,843 Canada1,616

Comparing growth rates: China’s growth rate at 7% is considered poor and worrying…

Comparin g growth rates: Growth of 2.6% is considered really positive for the UK!

Comparing growth rates: Different countries have different ‘potential’ to grow Less developed countries have higher growth potential As they adopt technology already developed As labour moves from low productivity primary industries such as farming to more productive secondary (manufacturing) and tertiary (services) industries Highly developed countries have to work harder to squeeze out more output with their already very productive and sophisticated production and workforce