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What is economic Growth?
Economic growth is the percentage increase in real national output (real GDP) in a time period of
sustained increase of productive potential of an economy. Countries grow at different rates, this is
because they are at different stages in the economic cycle.
How do we measure the size of an economy?
Gross Domestic Product (GDP):- this is more commonly used. GDP measures the monetary value of
all the goods and services produced in an economy. Nominal GDP measures the total monetary value
of all the goods and services produced in an economy over a given time period. Real GDP is adjusted
for inflation and shows that value of all the goods and services produced in a year in an economy.
GDP= C+I+G+NX. NX=exports-imports. GDP per capita is used to measure the average individual , it is
measured by having GDP divided by population.
Gross National Product (GNP):-this is GDP plus income earned abroad on investments and other
assets minus income paid to foreigners on their investments.
What are problems with using GDP (PC) to measure living standards?
Income Distribution: GDP PC tells you what the average person gets, but it does not show
you the distribution of income. The richest classes could get a significantly higher income than
the poorer classes.
`Happiness': GDP PC does not measure stress, emotions, depression or relationships of the
Health: A person who is unhealthy has a low standard of living; their quality of life is
Politics: Political freedoms affect standards of living e.g. the ability to vote, to speak, to
criticise the government.
Social factors: Crime could be high, so there is more violence and robbery. Education also
affects living standards e.g. literacy, the ability to read and write.
Environmental Factors: If GDP is high then the pollution is likely to be high, and living
standards are low. E.g. air pollution harms health.
Black Market: Goods and services can be brought on the black market, so living standards
are higher but GDP PC does not incorporate this.
Problems of comparison between developed and developing countries:
Developed countries=high incomes: USA, UK, France, Australia, New Zealand, and Germany.
Developing countries=low incomes: Congo, Ghana, and Bangladesh.
1. Income distribution: In LDCs, income distribution is more unequal than in HIC, so it is harder to
compare living standards.
2. Black Market: In LDCs the black market is likely to be larger than in HICs. There are more
illegal transactions in LDCs and more employment in informal markets.
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Exchange Rates: Market exchange rates fluctuate a lot, also GDP includes all goods/services
in an economy regardless of their impact on living standards. Purchasing Power Parity must
be used to convert currencies. PPP involves comparing the same basket of goods/ services
in both countries.
Main advantages of Economic Growth:
Employment: real economic growth stimulates unemployment since labour depends on
demand. An increase in real GDP causes an outward shift in AD for labour.…read more
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A lack of AD e.g. maybe due to the lack of investment or lack of confidence in the economy
and/or higher interest rates defers borrowing.
Supply Side Shock e.g. there could be higher energy prices shifting AS left, so there are
higher prices and less output.
What are the reasons for the economic cycle?
Political- in the run up to the government elections, the government will want the economy
to grow and likely to increase AD. Causing growth and a decrease in unemployment.…read more