2.1 Measures of Economic Performance

THEME 2:
2.1.1 Economic growth

THE UK
ECONOMY –
PERFORMAN What is economic growth?
CE AND
POLICIES How is economic growth measured?
What is happening with UK economic growth at the

moment? How does this compare to your country?
2.1 MEASURES OF ECONOMIC

Edexcel PERFORMANCE
Economics
LEARNING OBJECTIVES
By the end of this lesson you will be able to:

a) Explain rates of change of real Gross Domestic Product (GDP) as a measure of economic growth
b) Distinguish between:
 real and nominal
 total and per capita
 value and volume
c) Understand other national income measures:
 Gross National Product (GNP)
 Gross National Income (GNI)
d) Compare rates of growth between countries and over time
e) Understand of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in international
comparisons
f) Understand the limitations of using GDP to compare living standards between countries and over time
g) Explain national happiness:
 UK national wellbeing
 The relationship between real incomes and subjective happiness
DEFINITION
We need to distinguish between short-run and

long-run economic growth.
What is the difference between short run and

long run in economics?
How do you think this could apply to the short

run and long run definition of economic growth?
HOW IS IT MEASURED?
Again, using the distinction between

short-run and long-run.
Short-Run
Long-Run
WHAT IS GDP?
 Watch the video and answer the following questions:
1. How is GDP calculated?
2. What are finished goods and services?
3. What are capital goods?
4. How is the value of national assets such as mountains, forest and

wildlife included in a nation's GDP?
5. Outline the impact on the GDP / GNI of your country of the following:
A. Multinational businesses which have established subsidiaries in your
country?
B. When citizens of your nation work or set up businesses overseas and

then send remittances back to their family?
GROSS DOMESTIC PRODUCT: A
DEFINITION
In order to understand the economic

cycle it is important that we understand
Gross Domestic Product (GDP).
How would you define GDP?

What about REAL GDP?
REAL GROSS DOMESTIC PRODUCT: A
DEFINITION
This is defined as:
“The value of goods and services produced

in the economy over a period of time
taking into account inflation.”
 Why does real GDP allow for more accurate

comparisons of GDP over time?
NOMINAL AND REAL VALUES
 Nominal value is expressed in monetary terms

 It does not take into account inflation (the average level
of prices)
 Real value takes into account inflation
 Real national output =
 Short-run economic growth is measured by the annual

percentage change in real national output, real national
income or real GDP
TOTAL AND PER CAPITA INCOME
 Total national income is the value of all goods and services

produced in a country
 Per capita income is total income divided by the number of
people in the country
 We look at real national income in order to give a
meaningful comparison when comparing the size of the
economy of different countries
 Real per capita income allows us to compare the standard of
living of individuals within each country
 Which countries do you think have the highest GDP per
capita?
 Where would your country be in the list?

VOLUME AND VALUE
 How would you distinguish between the

volume and value of output in a country?
OTHER NATIONAL INCOME
MEASURES
 The Gross National Product (GNP) of a country is the value

of all goods and services produced by domestic businesses
both at home and abroad, so it includes overseas assets
 The Gross National Income (GNI) of a country is its total

level of income
 We can divide both by the population to get GNP and GNI

per capita
 This has limitations as a comparator because many jobs in

low income countries are informal, rather than official,
therefore they are not given a financial record
COMPARISONS OF RATES OF
GROWTH BETWEEN COUNTRIES
OVER TIME
In pairs:
Visit the World Bank website and choose

three different countries.
What has happened to their rate of

economic growth over time?
What reasons can you find to explain

their rates of economic growth?
Present your findings back to the rest of

the class.
CORONAVIRUS AND
GDP
 All countries experienced large falls in GDP due

to the Coronavirus pandemic
 Which countries do you think experienced the
greatest drop in history?
 Watch the video and check your answers
PURCHASING POWER PARITIES (PPP)
 This is a method that allows us to look at the relative value of

different currencies
 It takes real GDP and divides it by the number of people within the
country
 It then converts the income into dollars to allow a comparison

between all countries around the world
 This allows us to see how much an individual from each country can
purchase given the average amount of income that they have
List of countries based on GDP (at PPP) per capital.

THE LIMITATIONS OF USING GDP
TO COMPARE LIVING STANDARDS
 Real GDP per capita and economic growth are used

to compare living standards between countries
 However, problems arise in using it as a
measurement:
 Accuracy
 Shadow economy – what is this?
 Transactions without a monetary value – for
example?
 Negative externalities not included – example?
 Inequalities in income and wealth
PROBLEMS OF COMPARISON BETWEEN
DEVELOPED AND DEVELOPING
COUNTRIES
 Accuracy of statistics
 Developing countries often consume what they
produce - no monetary value
 Developed countries - increase incomes BUT loss
of quality of life – example?
 Developing countries might wish to achieve
growth at the expense of health and safety –
example?
 Alternative methods of measuring the quality of
life are available – example?
NATIONAL HAPPINESS
 The UN regularly publish a World Happiness Report:

 They have identified six factors that impact on happiness:
o real GDP per capita
o healthy life expectancy
Can we measure
o having someone to count on
happiness?
o perceived freedom to make life choices
o freedom from corruption
o Generosity
o Which country is the happiest, according to the UN?
 Richard Layard, author of the influential ‘Happiness: Lessons from a new

science’ discusses the Big Seven Factors affecting happiness:
o family relationships
Ricard Layard: o financial situation
Action for o work Rank these 7 factors in order
Happiness. o community and friends of importance to you and
o health your personal happiness.
o personal freedom
o personal values
NATIONAL HAPPINESS
 Happiness economics is a branch of economics that looks at how

content individuals are with their life from a theoretical and scientific
viewpoint:
 standard measures of living standards do not consider contentment

Can we measure
happiness?  money does not buy happiness
 You can be rich and unhappy; poor but happy
 However, there is a clear relationship between real income and

subjective happiness
Take the test:
Where would
you be happy?
NATIONAL HAPPINESS
 The Government now

research national
wellbeing
 What comments
would you make on
the data?
LEARNING OBJECTIVES
Now you should be able to:
a) Explain rates of change of real Gross Domestic Product (GDP) as a measure of economic growth
b) Distinguish between:
 real and nominal
 total and per capita
 value and volume
c) Understand other national income measures:
 Gross National Product (GNP)
 Gross National Income (GNI)
d) Compare rates of growth between countries and over time
e) Understand of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in international
comparisons
f) Understand the limitations of using GDP to compare living standards between countries and over
time
g) Explain national happiness:
 UK national wellbeing
 The relationship between real incomes and subjective happiness
MULTIPLE CHOICE 1
 Economic growth is usually measured by
a) the retail price index
b) real national income
c) the output of the manufacturing industry
d) consumer expenditure
 Can you explain your answer?

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THEME 2:

2.1.1 Economic growth

What is happening with UK economic growth at the

2.1 MEASURES OF ECONOMIC

By the end of this lesson you will be able to:

We need to distinguish between short-run and

What is the difference between short run and

How do you think this could apply to the short

Again, using the distinction between

 Watch the video and answer the following questions:

1. How is GDP calculated?

2. What are finished goods and services?

3. What are capital goods?

4. How is the value of national assets such as mountains, forest and

B. When citizens of your nation work or set up businesses overseas and

In order to understand the economic

How would you define GDP?

This is defined as:

“The value of goods and services produced

 Why does real GDP allow for more accurate

 Nominal value is expressed in monetary terms

 Real national output =

 Short-run economic growth is measured by the annual

 Total national income is the value of all goods and services

 Where would your country be in the list?

 How would you distinguish between the

 The Gross National Product (GNP) of a country is the value

 The Gross National Income (GNI) of a country is its total

 We can divide both by the population to get GNP and GNI

 This has limitations as a comparator because many jobs in

Visit the World Bank website and choose

What has happened to their rate of

What reasons can you find to explain

Present your findings back to the rest of

 All countries experienced large falls in GDP due

 This is a method that allows us to look at the relative value of

 It then converts the income into dollars to allow a comparison

List of countries based on GDP (at PPP) per capital.

 Real GDP per capita and economic growth are used

 The UN regularly publish a World Happiness Report:

 Richard Layard, author of the influential ‘Happiness: Lessons from a new

 Happiness economics is a branch of economics that looks at how

 standard measures of living standards do not consider contentment

 You can be rich and unhappy; poor but happy

 However, there is a clear relationship between real income and

 The Government now

 Economic growth is usually measured by

a) the retail price index

b) real national income

c) the output of the manufacturing industry

 Can you explain your answer?

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