Download Topic 2.1.1 Measures of economic performance student version

How do we measure economic performance?
2.1 Unit content
Four topics:
2.1.1 Economic growth (see topic 2.5)
2.1.2 Inflation
2.1.3 Employment and unemployment
2.1.4 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)
• 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 - 2005 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. Usually 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).
 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.
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 3rd 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 nontraded 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?