2.1.1a Measures and comparisons of growth

Real vs nominal GDP

$$Economic\; growth=\frac{{real\; GDP}_t-{real\; GDP}_{t-1}}{{real\; GDP}_{t-1}}\times 100\%$$

1. Nominal GDP can rise even when output is unchanged, simply because prices have risen, so it overstates genuine growth.
2. Real growth is therefore approximately nominal growth minus the rate of inflation:

$$real\; growth\approx nominal\; growth-inflation$$

Value, volume and per capita

$$GDP\; per\; capita=\frac{GDP}{population}$$

1. GDP per capita is the better guide to living standards because it adjusts for the size of the population, so fast population growth can leave people no better off even when total GDP is rising.

GDP and GNI

$$GNI=GDP+net\; income\; from\; abroad$$

1. The two diverge when large net income flows cross borders, such as profits sent home by foreign firms; in Ireland, heavy multinational activity makes GNI markedly lower than GDP.

International comparisons

1. To compare growth across countries and over time the figures must be made comparable: real, per capita and expressed in a common currency.
2. The same income buys more where local prices are low, so PPP-adjusted figures give a fairer comparison of living standards than market exchange rates; India, for instance, is around the fifth-largest economy at market exchange rates but the third-largest once output is measured at PPP.
3. Comparisons remain imperfect because data reliability, the size of the informal economy and income distribution differ between countries.

2.1.1b Limitations of GDP and national happiness

What GDP omits

1. A rise in GDP does not always mean a rise in living standards, because output and welfare are not the same thing.
2. GDP omits unpaid household work and output in the hidden economy, so it understates true activity.
3. It ignores how income is distributed, so an average can hide wide inequality.
4. It takes no account of negative externalities such as pollution, nor of the value of leisure time.

Comparing living standards

1. Comparisons over time must use real GDP per capita to strip out inflation and population change.
2. Comparisons between countries must adjust for purchasing power parity and still face differences in data reliability and in what is counted.
3. Public services, working hours and the size of the informal economy vary, so like-for-like comparison is difficult.

National wellbeing

1. In the UK the ONS surveys life satisfaction, sense of worth, happiness and anxiety alongside GDP.
2. Higher real incomes tend to raise happiness, but only up to a point; beyond a threshold, further rises add little to measured subjective happiness (the Easterlin paradox).
3. So GDP per capita is a useful guide to material output but an incomplete measure of welfare.

Does higher GDP mean higher living standards?

1. It holds because higher real GDP per capita usually funds more goods, better public services and rising life expectancy, and across countries richer populations tend to report greater life satisfaction.
2. But GDP ignores distribution, pollution, non-market work and leisure, so growth concentrated among the richest or driven by environmental damage can raise the headline figure without improving most people's lives.
3. But beyond a threshold of income the link to subjective happiness weakens, so extra output adds little welfare in an already-rich economy like the UK.
4. On balance, whether higher GDP means higher living standards depends on how the gains are distributed, what they cost the environment, and the income level the country starts from.