Category: Economics 10e: Ch 15

GDP is quite a good measure of a nation’s production of goods and services, but it doesn’t include many other factors relating to the standard of living in an economy and for this reason, various other measures of living standards have been developed. However, there is also another issue with GDP and that relates to how best to measure a country’s economic performance. Should we use GDP per head or GDP growth? Population changes can significantly distort economic welfare and so do need to be taken into account. The article below from The Economist looks at these issues in depth and considers the best way to measure economic performance.

Grossly distorted picture The Economist (13/3/08)

Questions

1. Explain how GDP per head can fall while economic growth is rising.
2. Explain why the use of GDP per head as a measure of economic performance may lead to the definition of recession being flawed.
3. Assess the principal factors that result in economic growth and GDP per head rising together.

Concerns have been growing that the UK faces a downturn in economic growth during 2008. The articles below consider this possibility. With a credit crunch taking place and manufacturing output falling, the concerns for a recession may well not prove unfounded.

Is this the big one? Guardian (3/1/08)
Your survival plan if a recession strikes Times Online (5/1/08)
Top of the flops – 10 pointers to a downturn in 2008 Guardian (6/1/08)
Recession fears as manufacturing drops Times Online (11/1/08)
Crash that ‘won’t happen here’ looms large Guardian (3/12/07)

Questions

1. What are the key indicators of an impending recession?
2. Assess the likelihood of a recession in the UK in 2008.
3. What policies could the UK government adopt to avoid a recession during 2008. What would determine the success of such policies?

The French President, Nicolas Sarkozy, has asked a panel of economists, including Joseph Stiglitz, to come up with new measures of the quality of life as an alternative to the more traditional measures of GDP and production. He believes that traditional GDP measures understate the developments that have taken place in France.

Sarkozy seeks le feel-good factor Times Online (10/1/08)
France seeks new growth measure BBC News Online (8/1/08)
Beyond GDP – odd numbers Conde Nast Portfolio.com (9/1/08)

Questions

1. Explain why traditional GDP measures may not be a good measure of the standard of living.
2. Define what is meant by an Index of Sustainable Welfare.
3. Use the ‘Make your own ISEW‘ on the Friends of the Earth web site to assess the factors that make the most difference to the standard of living.

In the 1990s UK living standards were estimated to be 4% below those of the USA, 33% less than in Germany and 26% lower than those in France. However, faster economic growth in the past two decades has, according to Oxford Economics, led to average incomes overtaking those in the USA and rising some 8% more than those of France and Germany.

UK living standards outstrip US Times Online (6/1/08)
…but at least we’ve got one up on the Yanks Guardian (6/1/08)

Questions

1. Explain the difference that the value of sterling makes to the measure of the standard of living.
2. “With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes”. Define what is meant by purchasing power parity (PPP). Why does the standard of living need to be measured at PPS rates?
3. Discuss the principal factors that have led to the increase in the standard of living in the UK.

Do you know what the current rate of economic growth is? Probably not. In the article below Larry Elliott argues that this may indicate that the link between economic growth and happiness has been broken and that alternative measures of GDP may be more helpful in analysing the performance of the economy.

Cameron should count on happiness Guardian (27/8/07)

Questions

1. Explain what is meant by the term ‘Index of sustainable economic welfare’.
2. Examine three factors that may raise economic welfare that are not included in a conventional measure of GDP.
3. Use the Friends of the Earth make your own ISEW site to analyse the factors that may contribute the most to economic welfare. Discuss the arguments for and against the introduction of an ISEW as an official government measure of economic welfare.