Measuring Economic Growth

Economics: Edexcel A A Level, topic 3.1.1

Economic Growth

Economic growth can be measured in a number of ways by looking at a range of economic variables.

Economic growth is defined as an increase in real GDP. That is an increase in the real value of goods and services produced in an economy in a given period of time.
It is usually calculated on an annual or quarterly basis and is given as a growth rate.
If real GDP is growing, this means the value of goods and services being produced is rising. So it should mean, ceteris paribus (everything else equal), that incomes and standards of living are rising.

Goods and services need to be distributed among the people, so population size matters.
A better measure of economic strength is real GDP per capita (per capita means divided by the population).
E.g. China’s real GDP is X, but its GDP per capita is Y because it has so many people. Whereas Qatar’s real GDP is X but its GDP per capita is higher. So the “average” person has a higher income in Qatar than in China.

This is an additional exchange rate adjustment that equalises the price of internationally traded goods across countries.

If, at a certain exchange rate, it is cheaper to buy goods in one country than another, businesses will buy goods in the cheaper country and sell in the other for a profit.
This is arbitrage. It forces prices and exchange rates to align over time, e.g. increased demand in the cheaper country might lead the price there to eventually increase, closing the 'gap'.

The PPP exchange rate remains fairly constant year round, so it can be easily compared.
Exchange rates will often get closer to the PPP as time passes.
Knowing the PPP will allow you to track and predict exchange rate relationships.
PPP can help you to examine the relative living conditions of different countries.

What is the term that describes being able to buy goods in cheaper countries and sell them in other countries for profit?
Which of the following are benefits of PPP?