Economic growth and the economic cycle: measurement
Specification notes
Unit 2.1.2 Macroeconomic indicators covers the data sets uses to measure economic
performance, including economic growth.
The main measure of economic growth is GDP: Gross Domestic Product, which (to
all intents and purposes) is equivalent to Aggregate Demand, i.e. C+I+G+(X-M)
The specification requires you to distinguish between nominal GDP and real GDP
and exam questions may require you to calculate the difference between nominal
and real data.
This calculation is done by applying a price deflator, equivalent to the rate of
inflation. The price deflator and many other trends in economic data are most often
shown in the form of index numbers which are covered in the next presentation
2.3.1c
,GDP calculation methods
Nominal vs real values
Economic data are often given as nominal values.
Nominal values refer to the actual or current values during the time period.
Nominal GDP is calculated by multiplying the quantity (or volume) of goods and
services produced in the economy by their actual market or current prices in the
given time period: Quantity x Price = Value
Nominal GDP is also often referred to as money GDP or GDP at current prices or
GDP at market prices. Look for all of these terms in exam questions. They all mean
the same!
Wages are also referred to in a similar way, i.e. as money or nominal wages.
The problem with nominal values
Nominal values give a misleading view of economic data. This is because they
include changes in prices over time.
If prices rise due to inflation, it makes data such as GDP (the size of the economy) or
appear bigger than the actual volume i.e. quantity increase in output.
If prices fall due to deflation, it understates the actual volume or changes in quantity.
The same is true for other economic data such as wages.
Real values or data
Real GDP is
the value of
economic
output after
adjusting for
(i.e.
removing)
changes in
the price
level.
Real GDP (and similar economic data such as real wages), is more meaningful than
nominal or money GDP because it ignores any variations due to changes in price due
to inflation (or deflation) and refers to the value of the actual quantities of output (or
income or expenditure)
Typically, real GDP is presented using the same price for every time period.
Therefore, it is also referred to as GDP at constant prices or “GDP chained volume
measures”.
Calculating real GDP from nominal GDP
, In order to calculate real GDP from nominal or money GDP, it is necessary to know,
and then remove, the changes in the price level over the time period covered by the
data. In economic data, this figure is equivalent to the rate of inflation.
Nominal GDP is converted to real GDP by applying the rate of inflation in each time
period in a series. This is known as a price deflator*. The simple equation for this is
therefore:
GDP by sector
The proportions of each sector remain relatively stable over time and there is little
variation between real and nominal values.
The following data are based on nominal values for 2019:
Consumption: 64.0%
Investment: 18.3%
Government spending: 19.1%
Net exports (X-M): -1.4%
Exports equate to 31.2% of GDP
Imports equate to (negative) 33.6% of GDP
Living standards
The specification asserts that GDP is an indicator of “living standards”
When we talk about “living standards” we are discussing economic welfare, that is
the quality of our lives
The concept of economic welfare is also referred to as economic (or human)
development or economic well-being
GDP is a limited measure of development
However, economic growth – as measured by GDP is a limited or even misleading
measure of economic welfare or living standards because:
1. GDP excludes other factors that contribute to the quality of life
2. GDP includes negative outputs that reduce the quality of life
a. Demerit goods
b. Negative externalities
3. GDP (per capita) is only an average so does not indicate how (un)equally income
is distributed among the population
a. GDP per capita (i.e. income per person) is only an average so does not
indicate how (un)equally income is distributed among the population.
b. It is true that when the average GDP per capita increases, it generally
means that those on the lowest incomes (including those living in
poverty) generally increase: “a rising tide lifts all boats”
4. GDP does not include all economic activity
a. GDP does not include all activity in a country that can increase (or
decrease) economic well-being such as:
Specification notes
Unit 2.1.2 Macroeconomic indicators covers the data sets uses to measure economic
performance, including economic growth.
The main measure of economic growth is GDP: Gross Domestic Product, which (to
all intents and purposes) is equivalent to Aggregate Demand, i.e. C+I+G+(X-M)
The specification requires you to distinguish between nominal GDP and real GDP
and exam questions may require you to calculate the difference between nominal
and real data.
This calculation is done by applying a price deflator, equivalent to the rate of
inflation. The price deflator and many other trends in economic data are most often
shown in the form of index numbers which are covered in the next presentation
2.3.1c
,GDP calculation methods
Nominal vs real values
Economic data are often given as nominal values.
Nominal values refer to the actual or current values during the time period.
Nominal GDP is calculated by multiplying the quantity (or volume) of goods and
services produced in the economy by their actual market or current prices in the
given time period: Quantity x Price = Value
Nominal GDP is also often referred to as money GDP or GDP at current prices or
GDP at market prices. Look for all of these terms in exam questions. They all mean
the same!
Wages are also referred to in a similar way, i.e. as money or nominal wages.
The problem with nominal values
Nominal values give a misleading view of economic data. This is because they
include changes in prices over time.
If prices rise due to inflation, it makes data such as GDP (the size of the economy) or
appear bigger than the actual volume i.e. quantity increase in output.
If prices fall due to deflation, it understates the actual volume or changes in quantity.
The same is true for other economic data such as wages.
Real values or data
Real GDP is
the value of
economic
output after
adjusting for
(i.e.
removing)
changes in
the price
level.
Real GDP (and similar economic data such as real wages), is more meaningful than
nominal or money GDP because it ignores any variations due to changes in price due
to inflation (or deflation) and refers to the value of the actual quantities of output (or
income or expenditure)
Typically, real GDP is presented using the same price for every time period.
Therefore, it is also referred to as GDP at constant prices or “GDP chained volume
measures”.
Calculating real GDP from nominal GDP
, In order to calculate real GDP from nominal or money GDP, it is necessary to know,
and then remove, the changes in the price level over the time period covered by the
data. In economic data, this figure is equivalent to the rate of inflation.
Nominal GDP is converted to real GDP by applying the rate of inflation in each time
period in a series. This is known as a price deflator*. The simple equation for this is
therefore:
GDP by sector
The proportions of each sector remain relatively stable over time and there is little
variation between real and nominal values.
The following data are based on nominal values for 2019:
Consumption: 64.0%
Investment: 18.3%
Government spending: 19.1%
Net exports (X-M): -1.4%
Exports equate to 31.2% of GDP
Imports equate to (negative) 33.6% of GDP
Living standards
The specification asserts that GDP is an indicator of “living standards”
When we talk about “living standards” we are discussing economic welfare, that is
the quality of our lives
The concept of economic welfare is also referred to as economic (or human)
development or economic well-being
GDP is a limited measure of development
However, economic growth – as measured by GDP is a limited or even misleading
measure of economic welfare or living standards because:
1. GDP excludes other factors that contribute to the quality of life
2. GDP includes negative outputs that reduce the quality of life
a. Demerit goods
b. Negative externalities
3. GDP (per capita) is only an average so does not indicate how (un)equally income
is distributed among the population
a. GDP per capita (i.e. income per person) is only an average so does not
indicate how (un)equally income is distributed among the population.
b. It is true that when the average GDP per capita increases, it generally
means that those on the lowest incomes (including those living in
poverty) generally increase: “a rising tide lifts all boats”
4. GDP does not include all economic activity
a. GDP does not include all activity in a country that can increase (or
decrease) economic well-being such as:
