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Study Notes

2.1.1 Economic Growth (Edexcel)


Last updated 19 Sept 2023

This study note for Edexcel covers economic growth.

Here are structured study notes for A-level economics on the topics of economic growth, measurement of economic variables (real vs. nominal, total vs. per capita, value vs. volume), other national income measures (Gross National Income), comparison of growth rates, Purchasing Power Parities (PPPs), limitations of using GDP for comparisons, and national happiness:

A) Rates of Change of Real Gross Domestic Product (GDP) as a Measure of Economic Growth

1. Economic Growth

  • Economic growth refers to the increase in a country's real GDP over time.
  • It signifies an expansion of an economy's production capacity and is a key indicator of its overall economic health.

2. Measuring Economic Growth

  • Economic growth is typically measured by calculating the percentage change in real GDP over a specific period, such as a year.
  • The formula for growth rate is: Growth Rate = [(GDP at Time 2 - GDP at Time 1) / GDP at Time 1] × 100.

B) Distinction Between Economic Measures

1. Real vs. Nominal

  • Real: Real values adjust for inflation and reflect changes in the quantity of goods and services produced.
  • Nominal: Nominal values do not adjust for inflation and represent current market prices.

2. Total vs. Per Capita

  • Total: Total values represent the aggregate sum of a variable for a given population or area.
  • Per Capita: Per capita values represent the average amount per person and are calculated by dividing the total by the population.

3. Value vs. Volume

  • Value: Value represents the monetary worth of goods and services produced.
  • Volume: Volume measures the physical quantity of goods and services produced, disregarding their monetary value.

C) Other National Income Measures: Gross National Income (GNI)

1. Gross National Income (GNI)

  • GNI includes the total income earned by a country's residents and businesses, both domestically and abroad.
  • It is a broader measure than GDP and considers income earned from overseas investments and remittances.

D) Comparison of Rates of Growth Between Countries and Over Time

1. Cross-Country Comparisons

  • Comparing growth rates between countries helps assess relative economic performance.
  • It can reveal disparities in development and highlight factors contributing to growth.

2. Long-Term Trends

  • Examining growth rates over time reveals economic patterns and trends.
  • Long-term analysis can identify periods of economic expansion, recession, or stagnation.

E) Understanding of Purchasing Power Parities (PPPs) and Their Use in International Comparisons

1. Purchasing Power Parities (PPPs)

  • PPPs are exchange rates that equalize the purchasing power of different currencies for a common basket of goods.
  • They account for price differences between countries and facilitate meaningful international comparisons.

Example: If the exchange rate suggests that 1 USD equals 100 Japanese yen, but the PPP-adjusted exchange rate is 1 USD equals 110 yen, it means that the yen has greater purchasing power in Japan.

F) Limitations of Using GDP to Compare Living Standards

1. Income Distribution: GDP per capita does not account for income inequality, and a high GDP may conceal disparities in living standards.

2. Non-Market Activities: GDP excludes non-market activities like household labor and informal economies, leading to an incomplete picture of living standards.

3. Quality of Life: GDP does not measure factors such as healthcare, education, environmental quality, and overall well-being.

G) National Happiness

1. UK National Wellbeing

  • Some countries, including the UK, have explored measures of national wellbeing to complement GDP.
  • These measures consider factors like life satisfaction, mental health, and social connections.

2. Relationship Between Real Incomes and Subjective Happiness

  • Research suggests that while higher incomes are associated with increased happiness up to a point, the relationship between income and happiness diminishes beyond a certain income level.

Example: The World Happiness Report ranks countries based on factors like income, social support, life expectancy, freedom to make life choices, trust, and generosity.

Understanding these economic concepts and their practical applications is crucial for assessing economic growth, making international comparisons, and recognizing the limitations of traditional measures like GDP in capturing the overall well-being of a population.

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