Summary of Economic Growth (Weil, 2013) - written and donated to WorldSupporter in 2014

Chapter 1: The facts to be explained

Measurement of economic development: GDP versus PPP

The indicator commonly used to examine the degree of development of a country’s economy is the Gross Domestic Product (GDP). It measures the market value of all services or final goods produced in a country during a year. It can be calculated as either the total income earned in a country or the value of the output produced in a country.

Economic measurement with the GDP (output or national income) also includes potential problems. For instance, GDP also includes foreign investment and does then not represent wealth in that Country, but the foreign investment value. In addition, many aspects of economic wealth cannot be measured by GDP.

The source of a high total GDP value could be extensive population density, because more people are available as labour force. Therefore, when comparing countries with different population sizes it is advisable to compare the GDP per capita (GDP earned per capita). Despite these potential problems, GDP remains a rough estimate for comparing different living standards.

A further potential problem when comparing GDP values of different countries, is the influence of exchange rates, which are only determined by international traded goods. Therefore, converting different incomes in one exchange rate can create a wrong picture of the true purchasing value of a currency.

Therefore, the Purchasing Power Parity (PPP) provides a measurement of national income based on the relative purchasing power of a currency, measured by the price of a standardized basket, which contains a set of traded and non-traded goods and services. The PPP corrects the GDP per capita measures.

Measurement: growth rates of national income

A country’s growth rate of income can be used as a measurement of the speed of development/growth. The growth rate is important because a country that grows fast will move to a higher level of income in the future.
 

When working with income growth rates, two concepts of graph scales need to be considered:

• The ratio scale (also called logarithmic scale) is mainly used for plotting variables like growth rates which grow over time. Spaces on the vertical axis correspond to proportionality differences in the variable.

• The common linear scale uses equal spaces on the vertical axis, corresponding to equal differences in the variable.

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