Measurements of economic performance

Economic Growth

There are two meanings for this term as you can have actual growth which is an increase in real incomes or gross domestic product (GDP) or potential growth, which is an increase in an economies productive output.

If measured using national income then it is meaningless as it needs to be given in real terms rather than nominal terms, because for example lets say the income of a country rises by 10%, if the population increased by greater than 10% then people may find they are actually worse off per head, therefore GDP must be given per capita. Real terms also takes account of inflation and is adjusted accordingly.

On top of this, when looking at growth it's better to look at the values of the goods produced as opposed to the volumes, as China for instance produces massive quantities of goods of low value, in contrast Germany produces fewer goods but of significant value and as a result Germany's GDP is actually greater.

GDP is the sum of all the goods and services that are produced within an economy as well as the sum of the incomes and the sum of all expenditure over a set time period, typically a year or a quarter. It's basically a circular flow of income involving goods, income and expenditure, and therefore what goes in must come out, right? Wrong. There are a lot of errors and omissions that lead to discrepancies in the data that i'll come onto.

To sum up, an increase in GDP is when a country is producing more goods and services, has higher incomes, or greater expenditure in a year. This is good as it means people are having access to more goods and services and therefore in theory have a better standard of living. However, GDP doesn't take into account a lot of factors, for instance if i work more hours then my income will increase, but it won't be increasing due to a strengthened economy, but due to my simply wanting or needing to work more hours.

When trying to compare GDPs on a global scale there can be some problems with regards to figures from different countries. For starters subsistence, bartering and the black economy are not incorporated into GDP. If farmers eat their own produce…