New figures from the Centre for Economics and Business Research show that the UK has slipped from the fifth to the sixth largest economy in the world as measured by GDP. This places the UK behind the USA, Japan, China, Germany and now France. Two years ago, the UK was fourth largest (ahead of China). However, is GDP the most appropriate measure of the success of an economy?
Zut! France leapfrogs UK in economic table Times Online (7/12/08)
UK drops below first France and then Italy in world GDP league table CEBR News Release (8/12/08)
Questions
- Explain the difference between GDP, GDP per capita and GDP measured on a purchasing-power-parity basis.
- Explain why “….. overvalued sterling has inflated the UK’s claims to be among the top five world economies.”
- Discuss whether GDP per capita is the most appropriate measure of economic success.
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. |
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. |