Growth in National Income

• Economic growth means an increase in national income – the economy is bigger
• An increase in national income means more goods and services are consumed, so should be an increase in living standards
• The measure used by most countries is Gross Domestic Product (GDP)
• GDP measures the total market value of all goods and services produced by a country in a given period of time
• So growth in Q2 2105 meant GDP grew by 0.7% in the UK
• Remember from the circular flow of income that income is identical to output which is identical to expenditure, so we do have different ways to measure it

• GDP can be measured in nominal or real terms. What does this mean?
• Nominal GDP measures GDP based on the price at the time the good is produced/sold
• The value of goods and services produced is calculated by price x quantity for all final goods
• So if the volume of goods produced does not change over 2 years, but the average price rises by 10%, nominal GDP increases by 10%
• But we are really interested in whether more goods and services are produced
• Real GDP strips out the impact of inflation by measuring GDP as if prices have not changed. So the 0.7% increase in Q2 2015 was an increase in real
GDP
• If Nominal GDP grows by 5% and inflation is 2% then real growth is 3%

• If GDP grew by 0.7%, does this mean living standards have increased?
• If the US economy is about 6 times larger than the UK, does this mean
US citizens are better off?
• Need to adjust for size of population
• GDP means GDP per person, so is GDP/population

• GDP measures the total market value of all goods and services produced
• However, this should be of final goods
• If I buy some potatoes from a farmer for £500 and produce lots of packets of crisps for £5,000 and sell these to a supermarket which then sells these for
£7,000 then GDP is £7,000 not £500 + £5,000 +£7,000
• It is only measured when spending is on new goods and services, it when a good is produced
• So measuring income it excludes any transfers, such as government payments of pensions, since the recipient does not produce anything
• It excludes sales of second hand goods (cars, old houses)

• There are many (sadly)
• Measuring the activities in an economy is complex, but takes into account the participants in an economy (the who), and their transactions with each other (the what)
• Gross National Income
• This is GDP plus net factor income from overseas
• This means wages, rent, interest and profits earned by UK residents overseas minus wages rent interest and profits earned in the UK by foreign residents
• Gross National Product
• Similar, but measures the total value of goods and services produced by the labour and property supplied by a country’s residents!

• Australia
• Brazil
• China
• Canada
• France
• Germany
• India
• Indonesia
• Italy
• Japan
• Netherlands
• Poland
• Russia
• Saudi Arabia
• South Korea
• Spain
• Sweden
• Switzerland
• Thailand
• Turkey
• United Kingdom
• United States
Country
United States
China
Japan
Germany
United Kingdom
France
India
Brazil
Italy
Canada
Size ($billion, 2015)
18,125
11,212
4,210
3,414
2,853
2,470
2,308
1,904
1,843
1,616

China’s growth rate at 7% is considered poor and worrying…

• Different countries have different ‘potential’ to grow
• Less developed countries have higher growth potential
• As they adopt technology already developed
• As labour moves from low productivity primary industries such as farming to more productive secondary (manufacturing) and tertiary
(services) industries
• Highly developed countries have to work harder to squeeze out more output with their already very productive and sophisticated production and workforce