How do we measure Economic Growth?
National Income
Gross Domestic Product (GDP)
Since Macroeconomics is the study of the whole economy, a key indicator of that
economy is the level of Output generated, often called the National Income.
Theoretical Explanation: The Circular Flow of Income
If we consider a simple Closed Economy (no foreign trade), where only households
and firms exist.
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Households own the wealth of the nation, in the form of, land, labour and capital.
Firms pay households for their use; rent, wages, profits, etc.
Firms produce Goods and Services.
Households pay firms for these goods and services
Since the money exchanged between these two groups continuously flows around the
economy, this concept is know as the Circular Flow of Income.
How do we measure Economic Growth?
As a result the level of economic activity can be measured in 3 ways:
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National Output – the value of the goods and services flowing from firms to
households.
National Expenditure – the level of spending by households on goods and
services.
National Income - the value of income paid by firms to households in return for
land labour & capital.
Real World Measurement: Gross Domestic Product
Clearly the economy is much more complicated than the simple model discussed, as such
a sophisticated set of accounting rules have been devised to calculate National Income.
The key measure, which is derived from these accounts, is the UK’s Gross Domestic
Product or GDP.
Activity
It is now your turn. You must write a short guide to measuring a nation’s level of
economic activity or National Income using Gross Domestic Product.
1. You may want to begin by defining Gross Domestic Product
http://economics.about.com/cs/economicsglossary/g/gdp.htm.
2. A key distinction when reading GDP figures is the difference between Nominal
(current prices) or Real (constant prices) GDP
http://economics.about.com/cs/macrohelp/a/nominal_vs_real.htm.
3.You could illustrate your explanation using some data
http://www.statistics.gov.uk/cci/nugget.asp?id=192
4. Explain the different ways the figure can be calculated (Output, Expenditure, Income)
Extension
4. Should you wish to provide a more in-depth explanation of the above and explain how
Gross National Product Differs, you may want to read
http://www.sparknotes.com/economics/macro/measuring1/section1.html.
5. You could even test yourself with a couple of questions
http://ingrimayne.saintjoe.edu/econ/Measuring/exploring_gdp.htm.