2.1.1: Economic Growth

• Economic Growth: Increase in potential output of an economy over time. It is measured by % Change in Real GDP
• Gross Domestic Product (GDP): Value of all goods and services produced in the economy
• Nominal GDP: GDP at current prices
• Real GDP: GDP adjusted for inflation (at constant prices)
• Real GDP per capita: Average income per person in an economy. Calculated by Real GDP / Population
• Value shows how much goods and services are worth, while volume shows the number produced
• Gross National product (GNP): GDP + net property income from abroad
• Gross National Income (GNI): GDP + Factor income from abroad - Factor incomes of non-nationals living in the country
• Purchasing Power Parities are used to assess living standards between countries. It is calculated by comparing price of a basket of goods in different countries
• Long run economic growth causes an outward shift in the PPF, while Short run economic growth causes a movement from inside the PPF further out
• Standard of living: Measure of economic welfare and wellbeing. More income generally increases standard of living, but the relationship is not exact
• Economists use real GDP per capita to work out standard of living
• Subjective happiness: Self-reported levels of happiness with life, based on emotion rather than material wellbeing
• Easterlin Paradox: Life satisfaction rises with income but above a certain point it stops increasing
• Limitation of real GDP per capita as measure of SOL: Income is distributed unequally
• Limitation of real GDP per capita as measure of SOL: The value of unpaid work in someone's life, such as childcare, is not included.
• Limitation of real GDP per capita as measure of SOL: Negative externalities of consumption and production on people's lives, such as Alcohol and Pollution
• Limitation of real GDP per capita as measure of SOL: Working hours, e.g someone earning a lot of money with very high working hours may not be happy
• Limitation of real GDP per capita as measure of SOL: Changing quality of goods and services, and technological improvements