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