2.3.1 Measures of economic performance
Economic growth
a) The rate of change of real Gross Domestic Product (GDP) as a measure of economic
growth and living standards.
Q: What is economic growth and how is it measured?
A: Economic growth is the increase in a country’s real national output over time. It is usually
measured by the annual percentage change in real GDP.
· Real GDP = the value of all goods and services produced, adjusted for inflation.
· If the economy grew by 4% but inflation was 2%, real economic growth is 2%.
· A rise in real GDP means the economy is producing more, which is generally associated
with higher living standards (more goods and services per person).
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b) Gross National Income (GNI) as an alternative measure of national income.
Q: How does GNI differ from GDP?
A:
· GDP measures output within a country’s borders.
· GNI (Gross National Income) = GDP plus net income from abroad (e.g. profits earned by
domestic firms overseas, remittances from citizens working abroad, minus income earned by
foreign residents within the country).
· GNI is useful for countries with large foreign investment or many citizens working overseas,
because it reflects the income actually earned by residents.
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c) The distinction between the following measures of GDP/GNI: real and nominal; total and
per capita; value and volume.
Q: What is the difference between real and nominal GDP?
A:
· Nominal GDP is measured at current prices – it does not adjust for inflation.
· Real GDP is adjusted for inflation, so it shows the true change in output.
Example: If nominal GDP grows by 4% but inflation is 2%, real growth is 2%.
Q: What is the difference between total and per capita GDP?
A:
· Total GDP = the whole monetary value of output in an economy.
,· GDP per capita = total GDP ÷ population. It measures average output per person, making it
more useful for comparing living standards between countries.
Q: What is the difference between value and volume?
A:
· Value measures output in monetary terms (e.g. £ billion).
· Volume measures output in physical units (e.g. tonnes of steel) or in constant prices (i.e.
real terms).
· Volume measures remove the effect of price changes and are better for comparing actual
production.
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d) Comparison of GDP/GNI rates of growth between countries and over time.
Q: What problems arise when comparing GDP growth rates across countries?
A:
· Different countries use different base years for constant prices.
· Exchange rate fluctuations distort comparisons when converting to a common currency.
· Differences in population size make total GDP less meaningful – per capita figures are
preferred.
· Informal economies (black markets) are not captured in official data, varying by country.
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e) The concept of Purchasing Power Parities (PPPs) in making international comparisons of
real GDP/GNI.
Q: What are PPP exchange rates and why are they used?
A:
· PPP (Purchasing Power Parity) adjusts exchange rates so that a given amount of money
buys the same basket of goods in different countries.
· It avoids the distortion of market exchange rates, which may not reflect true buying power.
· Example: If a car costs £15,000 in the UK and the exchange rate is $1.5/£, the PPP theory
suggests the same car should cost $10,000 in the US.
· PPP‑adjusted GDP per capita gives a more realistic comparison of living standards.
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f) The distinction between positive economic growth rates and negative economic growth
rates.
Q: What is the difference between positive and negative growth?
A:
, · Positive growth means real GDP is increasing – the economy is expanding.
· Negative growth means real GDP is falling – the economy is contracting, often leading to
falling incomes and rising unemployment.
---
g) The concept of ‘recession’ as two consecutive quarters of negative economic growth.
Q: How is a recession officially defined?
A: A recession is defined as two consecutive quarters (six months) of negative economic
growth.
· During a recession there is usually:
· Spare capacity (negative output gap)
· Demand‑deficient (cyclical) unemployment
· Low inflation (or deflation)
· Falling consumer and business confidence
· Worsening government budget (higher welfare spending, lower tax revenue)
---
h) The limitations of using GDP/GNI to compare living standards between countries and over
time.
Q: Why is GDP per capita not a perfect measure of living standards?
A:
· It ignores income distribution – two countries with the same GDP per capita may have very
different levels of inequality.
· Non‑market activities (e.g. housework, voluntary work) are excluded.
· The informal economy (cash‑in‑hand work) is not recorded.
· Negative externalities (pollution, congestion) are not deducted.
· Quality of life factors (leisure time, life expectancy, political freedom) are omitted.
· Purchasing power differences are not captured unless PPP is used.
· Composition of output – spending on defence or rebuilding after a disaster raises GDP
without necessarily improving welfare.
---
i) National happiness and wellbeing: indicators of national happiness and wellbeing; the
relationship between real incomes and subjective happiness.
Q: What alternative indicators measure wellbeing beyond GDP?
A:
· Human Development Index (HDI) combines life expectancy, education (mean years of
schooling and expected years), and GNI per capita (PPP).
Economic growth
a) The rate of change of real Gross Domestic Product (GDP) as a measure of economic
growth and living standards.
Q: What is economic growth and how is it measured?
A: Economic growth is the increase in a country’s real national output over time. It is usually
measured by the annual percentage change in real GDP.
· Real GDP = the value of all goods and services produced, adjusted for inflation.
· If the economy grew by 4% but inflation was 2%, real economic growth is 2%.
· A rise in real GDP means the economy is producing more, which is generally associated
with higher living standards (more goods and services per person).
---
b) Gross National Income (GNI) as an alternative measure of national income.
Q: How does GNI differ from GDP?
A:
· GDP measures output within a country’s borders.
· GNI (Gross National Income) = GDP plus net income from abroad (e.g. profits earned by
domestic firms overseas, remittances from citizens working abroad, minus income earned by
foreign residents within the country).
· GNI is useful for countries with large foreign investment or many citizens working overseas,
because it reflects the income actually earned by residents.
---
c) The distinction between the following measures of GDP/GNI: real and nominal; total and
per capita; value and volume.
Q: What is the difference between real and nominal GDP?
A:
· Nominal GDP is measured at current prices – it does not adjust for inflation.
· Real GDP is adjusted for inflation, so it shows the true change in output.
Example: If nominal GDP grows by 4% but inflation is 2%, real growth is 2%.
Q: What is the difference between total and per capita GDP?
A:
· Total GDP = the whole monetary value of output in an economy.
,· GDP per capita = total GDP ÷ population. It measures average output per person, making it
more useful for comparing living standards between countries.
Q: What is the difference between value and volume?
A:
· Value measures output in monetary terms (e.g. £ billion).
· Volume measures output in physical units (e.g. tonnes of steel) or in constant prices (i.e.
real terms).
· Volume measures remove the effect of price changes and are better for comparing actual
production.
---
d) Comparison of GDP/GNI rates of growth between countries and over time.
Q: What problems arise when comparing GDP growth rates across countries?
A:
· Different countries use different base years for constant prices.
· Exchange rate fluctuations distort comparisons when converting to a common currency.
· Differences in population size make total GDP less meaningful – per capita figures are
preferred.
· Informal economies (black markets) are not captured in official data, varying by country.
---
e) The concept of Purchasing Power Parities (PPPs) in making international comparisons of
real GDP/GNI.
Q: What are PPP exchange rates and why are they used?
A:
· PPP (Purchasing Power Parity) adjusts exchange rates so that a given amount of money
buys the same basket of goods in different countries.
· It avoids the distortion of market exchange rates, which may not reflect true buying power.
· Example: If a car costs £15,000 in the UK and the exchange rate is $1.5/£, the PPP theory
suggests the same car should cost $10,000 in the US.
· PPP‑adjusted GDP per capita gives a more realistic comparison of living standards.
---
f) The distinction between positive economic growth rates and negative economic growth
rates.
Q: What is the difference between positive and negative growth?
A:
, · Positive growth means real GDP is increasing – the economy is expanding.
· Negative growth means real GDP is falling – the economy is contracting, often leading to
falling incomes and rising unemployment.
---
g) The concept of ‘recession’ as two consecutive quarters of negative economic growth.
Q: How is a recession officially defined?
A: A recession is defined as two consecutive quarters (six months) of negative economic
growth.
· During a recession there is usually:
· Spare capacity (negative output gap)
· Demand‑deficient (cyclical) unemployment
· Low inflation (or deflation)
· Falling consumer and business confidence
· Worsening government budget (higher welfare spending, lower tax revenue)
---
h) The limitations of using GDP/GNI to compare living standards between countries and over
time.
Q: Why is GDP per capita not a perfect measure of living standards?
A:
· It ignores income distribution – two countries with the same GDP per capita may have very
different levels of inequality.
· Non‑market activities (e.g. housework, voluntary work) are excluded.
· The informal economy (cash‑in‑hand work) is not recorded.
· Negative externalities (pollution, congestion) are not deducted.
· Quality of life factors (leisure time, life expectancy, political freedom) are omitted.
· Purchasing power differences are not captured unless PPP is used.
· Composition of output – spending on defence or rebuilding after a disaster raises GDP
without necessarily improving welfare.
---
i) National happiness and wellbeing: indicators of national happiness and wellbeing; the
relationship between real incomes and subjective happiness.
Q: What alternative indicators measure wellbeing beyond GDP?
A:
· Human Development Index (HDI) combines life expectancy, education (mean years of
schooling and expected years), and GNI per capita (PPP).
