Summary Theme 2 Economics A-Level Edexcel A

GDP


Ways to measure GDP:


 Expenditure method
 Income method
 Output method


Sectors:


 Primary – Agriculture
 Secondary – Manufacturing and construction
 Tertiary - provision of services
 Quaternary – Tech and research and development


GNI is equal to the GDP + net earnings from uk citizens and uk
firms from abroad.


Macroeconomic Measures




 GNI/GNP is the total income earnt by a country regardless
of their geographical position. NET means on balance.
Total value of net earnings by citizens and businesses
abroad.


 Real GDP is important as standard of living can be
calculated. For example, if inflation increases by 20%, but
income increases by 15%, standard of living is lowered.


 Nominal GDP is only the number value without being
adjusted for inflation. Data is expressed at current prices.

,  Economic growth is the % annual increase in the GDP.

 Causes of economic growth:

- Better technology
- Labour productivity
- Increase in infrastructure.


 Costs of economic growth:


- Inflation
- Pollution
- Rising inequality
- Overuse of natural resources




GDP and economic growth


 Economic growth is an increase in GDP.
 GDP is the total value of goods and services produced in
an economy.
 Potential growth is a rise in the productive potential.
 Actual growth is the annual % increase in output
 Nominal growth is the increase of GDP without being
adjusted for inflation
 Real growth is the increase in GDP taking inflation into
account.
 Planned obsolescence is when firms deliberately flaw their
products, so the next product is bought.


GDP as a limited measure:


 USA has a GDP of $23 trillion. GINI coefficient of USA was
0.48. This doesn’t mean standard of living will always be
good.

,  0 is perfect equality and 1 is perfect inequality for GINI
coefficient.
 Low skilled workers have a low bargaining power due to
being on fixed incomes, whereas highly skilled workers
have a high bargaining power so they will see greater
increases in income.
 High income groups own assets such as houses, stocks
and shares, land
 High income groups experience a positive wealth effect
due to positive equity.
 Labour treated as a commodity.
 GDP doesn’t consider environmental impacts such as
pollution due to increase numbers of factories, negatively
affecting future generations.
 Economic activity in the informal sector is not accounted
for in the GDP. This is work that may be illegal.
Subsistence farming, street vendors.
 80% of India’s workforce does not pay income tax. Due to
cash in hand so is not included in GDP, so GDP is a
limitation.
 £4.4bn came from the sale of drugs and prostitution at
£5.3bn in 2015
 It is hard to measure activities in the intangible sector
such as quaternary.



Alternative measures of wellbeing:


 GPI= A + B – C - D + I


 A is income weighted private consumption.
 B is value of non-market services generating welfare
 C is private defensive cost of natural detoriation
 D is cost of detoriation of natural resources
 I is an increase in capital stock and balance of
international trade.

,  GPI – Higher education, volunteer work, - crime and -
family breakdown
 GNH and GPI are broader measures of wellbeing.




Economic Growth




 Purchasing power parity – Exchange rate required to
convert a unit of income into another country’s currency
such that the same value of basket of goods and services
that can be bought in both countries.
 One problem with PPP is that PPP may not be accurate as
there are differences in the weightings and baskets
compared of different countries.
 Another problem is that it does not consider the
transaction costs of converting currency.


Easterlin Paradox:


 Increasing GDP leads to richer countries, but happiness
does not increase.
 Standard of living increases to a certain threshold after
which happiness deteriorates after basics have been
fulfilled.


Inflation