Economics Theme 2
,2.1 Measures of economic performance
ayeshaax
2.1.1 Economic growth
a) Rates of change of real Gross Domestic Product (GDP) as a measure of economic growth
GDP is the total value of goods and services produced domestically by a country over a period
of time.
Economic growth refers to the increase in a country's real GDP over time. It signifies an
expansion of an economy's production capacity and is a key indicator of its overall economic
health.
b) Distinction between:
● real and nominal
Real strips out the effect of inflation whereas nominal doesn’t
● total and per capita
Total is the overall GDP, per capita is total GDP divided by people in country
● value and volume
Real values are the volume of national income and nominal values are the value of
national income
c) Other national income measures:
● Gross National Income (GNI)
The value of goods and services produced by a country over a period of time plus net
overseas interest payments and dividends
(the total amount of money earned by a nation’s people and businesses, both inside and
outside the country’s or region’s borders)
● Gross National Product (GNP)
The value of goods and services produced by a country over a period of time through
labour or property supplied by citizens of a country both domestically (GDP) or overseas
(what is produced by all citizens whether they’re in the country or not)
d) Comparison of rates of growth between countries and over time
● Between Countries
, Comparing growth rates between countries helps assess relative economic
performance. It can reveal disparities in development and highlight factors contributing
to growth
● Overtime
Examining growth rates over time reveals economic patterns and trends and identifies
periods of economic expansion, recession, or stagnation.
e) Understanding of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in
international comparisons
Purchasing Power Parities (PPPs) are exchange rates that equalise the purchasing power of
different currencies for a common basket of goods. They account for price differences between
countries and facilitate meaningful international comparisons.
In other words, PPPs are an exchange rate for one currency for another which compares how
much a typical basket of goods in the country costs compared to another country. An
alternative to using exchange rates for comparisons of GDP, so useful when comparing
countries as they account for the costs of living, which helps compare living standards.
The difference between GDPs (like the highest and lowest GDPs) would be smaller when PPPs
are used as poorer countries have a much lower cost of living. Example: £2 a day in the Kenyan
currency is enough to survive on, whereas in the UK it isn’t.
Example: If the exchange rate suggests that 1 USD equals 100 Japanese yen, but the PPP-adjusted
exchange rate is 1 USD equals 110 yen, it means that the yen has greater purchasing power in
Japan. (??)
f) The limitations of using GDP to compare living standards between countries and over time
1. Inaccuracy of data:
● Inefficiency of collecting/calculating data
● Black market, incomes not considered
● Home produced services not considered
● Calculating inflation rate
● Methods to calculate GDP change
● Should take away transfer payments
2. Inequalities - increase in GDP may be due to a growth in income of just one group of
people
, 3. Quality of goods and services - quality has increased, but not reflected in real price and
so standard of living has increased more than what GDP suggests. Technology may
cause prices to fall suggesting falling living standards but it's not true.
4. Comparing different currencies - figures usually converted to USD
5. Spending
EV - Some argue that PPP should be used to compare the standard of living in different countries.
g) (Gross) National happiness (GNH - economic complex which is another indicator for
economic development apart from GDP):
6 factors: Real GDP per capita, health, life expectancy, someone to count on, freedom of choice,
freedom from corruption, generosity
● UK national wellbeing report that measures how lives are improving, 4 questions: life
satisfaction, anxiety, happiness, worthwhileness. Updated on a quarterly basis.
● The relationship between real incomes and subjective happiness
Easterlin Paradox - Research suggests that while higher incomes are associated with
increased happiness up to a point, the relationship between income and happiness
diminishes beyond a certain income level.
2.1.2 Inflation
a) Understanding of:
● inflation
General increase in prices (price level) that erodes the purchasing power of money
● deflation
A general fall of prices (reduced price level) that indicates a slowdown in the rate of
growth of output in the economy
● disinflation
Reduction in the rate of inflation, prices are still rising but not by as much
,2.1 Measures of economic performance
ayeshaax
2.1.1 Economic growth
a) Rates of change of real Gross Domestic Product (GDP) as a measure of economic growth
GDP is the total value of goods and services produced domestically by a country over a period
of time.
Economic growth refers to the increase in a country's real GDP over time. It signifies an
expansion of an economy's production capacity and is a key indicator of its overall economic
health.
b) Distinction between:
● real and nominal
Real strips out the effect of inflation whereas nominal doesn’t
● total and per capita
Total is the overall GDP, per capita is total GDP divided by people in country
● value and volume
Real values are the volume of national income and nominal values are the value of
national income
c) Other national income measures:
● Gross National Income (GNI)
The value of goods and services produced by a country over a period of time plus net
overseas interest payments and dividends
(the total amount of money earned by a nation’s people and businesses, both inside and
outside the country’s or region’s borders)
● Gross National Product (GNP)
The value of goods and services produced by a country over a period of time through
labour or property supplied by citizens of a country both domestically (GDP) or overseas
(what is produced by all citizens whether they’re in the country or not)
d) Comparison of rates of growth between countries and over time
● Between Countries
, Comparing growth rates between countries helps assess relative economic
performance. It can reveal disparities in development and highlight factors contributing
to growth
● Overtime
Examining growth rates over time reveals economic patterns and trends and identifies
periods of economic expansion, recession, or stagnation.
e) Understanding of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in
international comparisons
Purchasing Power Parities (PPPs) are exchange rates that equalise the purchasing power of
different currencies for a common basket of goods. They account for price differences between
countries and facilitate meaningful international comparisons.
In other words, PPPs are an exchange rate for one currency for another which compares how
much a typical basket of goods in the country costs compared to another country. An
alternative to using exchange rates for comparisons of GDP, so useful when comparing
countries as they account for the costs of living, which helps compare living standards.
The difference between GDPs (like the highest and lowest GDPs) would be smaller when PPPs
are used as poorer countries have a much lower cost of living. Example: £2 a day in the Kenyan
currency is enough to survive on, whereas in the UK it isn’t.
Example: If the exchange rate suggests that 1 USD equals 100 Japanese yen, but the PPP-adjusted
exchange rate is 1 USD equals 110 yen, it means that the yen has greater purchasing power in
Japan. (??)
f) The limitations of using GDP to compare living standards between countries and over time
1. Inaccuracy of data:
● Inefficiency of collecting/calculating data
● Black market, incomes not considered
● Home produced services not considered
● Calculating inflation rate
● Methods to calculate GDP change
● Should take away transfer payments
2. Inequalities - increase in GDP may be due to a growth in income of just one group of
people
, 3. Quality of goods and services - quality has increased, but not reflected in real price and
so standard of living has increased more than what GDP suggests. Technology may
cause prices to fall suggesting falling living standards but it's not true.
4. Comparing different currencies - figures usually converted to USD
5. Spending
EV - Some argue that PPP should be used to compare the standard of living in different countries.
g) (Gross) National happiness (GNH - economic complex which is another indicator for
economic development apart from GDP):
6 factors: Real GDP per capita, health, life expectancy, someone to count on, freedom of choice,
freedom from corruption, generosity
● UK national wellbeing report that measures how lives are improving, 4 questions: life
satisfaction, anxiety, happiness, worthwhileness. Updated on a quarterly basis.
● The relationship between real incomes and subjective happiness
Easterlin Paradox - Research suggests that while higher incomes are associated with
increased happiness up to a point, the relationship between income and happiness
diminishes beyond a certain income level.
2.1.2 Inflation
a) Understanding of:
● inflation
General increase in prices (price level) that erodes the purchasing power of money
● deflation
A general fall of prices (reduced price level) that indicates a slowdown in the rate of
growth of output in the economy
● disinflation
Reduction in the rate of inflation, prices are still rising but not by as much
