Unit 3 Economics AOS2 Measuring Economic Growth + Limitations

All right. Hello. Hello, everyone, and welcome to the second video in our series about the goal of strong sustainable economic growth. Last video, we looked at just the definition of the goal, as well as the effects of not hitting the goal, either going above or below it, and how it helps us achieve some of the other goals. So today we're going to be looking at specifically how we measure economic growth in Australia, which is through gross domestic product, or real gdp, also known as chain volume GDP sometimes, but we're going to go through this step by step. How we measure it, some of the approaches to measuring it, and then the limitations of the measurement. And then the next video, we're going to look at some alternative measurements that exist to try and deal with those limitations. So measuring economic growth, we use gross domestic product, which is the final value of all goods and services produced in Australia over a given period of time. So it's just the total value of production. You could also say the total value of production of all goods and services produced in a nation over a period of time or a year, as we often use in Australia. That's totally fine, but that is gross domestic product. And so we've got chain volume measures of gdp, which are released quarterly and shown in both a dollar value and percentage change, which takes into account the annual market value of expenditure on gdp, and then uses special chain price indexes to deflate figures if there's been inflation or inflate them if there's been deflation. So this tries to get us a more accurate figure for GDP based on the situation that we are in. So essentially, chain volume GDP or real GDP, as it often gets called and more often gets called, either takes, removes the effects of inflation or adds on value if, if deflation has occurred, which is a worry in the next quarter. So at the moment, if you look at real GDP, it's at 2.2%, and the most recent inflationary figures are 2.2%. So that's kind of. That 2.2% growth is without the effects of inflation on it. And so we use chain volume GDP or real GDP because it gives us a more accurate figure. Because if we didn't take out the effect of price increases, what that would mean is that every year it'd look like we're producing more and more even though just the dollar value of those things is increased. And so by removing the effect of that increase, we get an accurate indication of if we're actually producing any more or not. The way I usually use this as an example is so say, for example, you produce 10 things and they're worth $1 each. Next year, if you still produce 10 things and they're worth$1.10 each, suddenly your GDP would be $11 rather than 10. And it looks like you're doing better even though you still produce the same overall amount of goods and services. So by taking out that inflation, it gives us a more accurate indication of if we've actually improved production or not. So to calculate gross domestic product. So economic growth occurs when there's a rise in the real value of goods and services produced in Australia from one year to the next. And this is measured by the percentage increase in real GDP in one year. There are some times you'll see this either annual or annualized figures for gdp. So annual figures are when it's just like the last 12 months are added together, so the last four quarters added together. Or sometimes you'll see annualized figures which is just 1/4 times by 4 to equate it to a year. So GDP estimates the annual value of goods and services produced or sold by a nation after removing the effect of price increases inflation. And by removing the effect of price changes, the real change in production can be better ascertained or acquired. So we're trying to find out the real change in production. So are we actually producing more goods and services or not? So GDP figures are prepared by the ABS every quarter. So in three month intervals. And the four quarters may be combined to produce the annual rate of economic growth. So that's what we've got at the moment at 2.2%. That is the annual rate of economic growth. If we were to look at the, if I'm to bring it up on my other screen. If we look at the economic indicators and we look at. Well that's not the one at all. I want a trading economics. So if we were to look at the quarterly figures, the last quarter we had a 0.5% growth rate. So as you can see, like that's not the same. So like that means that we had some high periods of high growth in the last four quarters and this quarter has been a little bit lower in general. And so the annual rate is currently 2.2%. If we were to annualize that last quarter, that would be 2%. GDP growth could be 0.5% times by 4. So when we look at GDP it's considered to be an estimation. And the reason why it's considered to be an estimation is that it's impossible to actually work out the, the exact value of production because there is Some estimation involved, especially with a lot of agricultural production. If you looked at the fact that, if you look at the fact that when you produce, say you're making grain and you're shipping grain, it's really hard to know exactly how much you are producing overall. So we estimate in three ways and we average out those three approaches to get the actual GDP figure. So the first one is the expenditure approach, which is the sum of final expenditure, which is equal to aggregate demand, and the total expenditure on final goods and services produced in Australia. So it's just the sum of consumption, investment, government and exports minus imports. The value of AD is our expenditure approach. We've got the income approach or the sum of incomes, which is equal to the total market value of incomes paid to low selling resources for production. So the wages and profits that businesses pay and earn, that all added together becomes the income approach and the production approach, which is the total value of goods and services produced each year minus the cost of production. So we average out these three figures and that becomes the GDP figure. And the reason why we do this, like sometimes people are like, well, wouldn't they all just be the same? Because producers make the amount that people spend and people spend the amount they earn. So not quite perfect because as we know from looking at aggregate demand, there are many leakages that come out of aggregate demand and therefore it doesn't all flow on perfectly. And so by averaging them out, we get the most accurate figure for gdp. Then why we calculate chain volume GDP is that inflation would exaggerate the rise in production and deflation would underestimate it, which we talked about before. So to account for this, the ABS adjusts GDP for price variations by comparing it to a base year which is always the year before. So how to calculate this? So if we look at this diagram, which I have very kindly taken from a very old textbook, if we look at these two years, we can see that in year one, GDP was 100 million and in year two it was 120 million. And if we look at the CPI it was 100 in each first year and 110 in the second year. So we work out chain volume GDP for year two. It's the price index in the base of the reference year over the price index in the year it needs to be adjusted times GDP at market prices of the year that needs to be adjusted. So we have those two indexes. So year one on top and year two on the bottom times by year two's value of gdp. And doing that takes away the effects of inflation and that gives us 109.09 million as the real GDP figure. And that shows that they did grow 9.09 million in production when you take out the effects of inflation. So lastly, what we're going to look at is the limitations of gdp. So GDP can be inaccurate because it excludes some non marketed goods and services. So things like if you wash your own dishes, you could pay someone to do that job which would contribute to gdp. If you mow your own lawns, also black market production. So anything that's sold on the black market doesn't include it towards gdp. Charity work doesn't come into it. And so anything that basically where the income isn't, no taxes paid on that income, it's not included in gdp. GDP also fails to distinguish between money spent on things that improve our welfare, so things like health and food against those that make it worse. So things like tobacco, alcohol, et cetera, all of that just goes in to say that we've produced more, we might be producing more things that actually really damage our living standards and GDP might look better because of it. GDP doesn't measure changes in quality. There's an interesting statistic that came out this year that car prices are having to fall at the moment because people aren't buying new cars. Because the newer cars that you can buy are way more like durable. Like the mechanics in them don't need to be updated as frequently, they don't break down as much, therefore people aren't replacing them. And so that will actually. Well, it's not going to decrease RGDP anymore because we don't have car production in Australia, but it could decrease the production of cars in other countries. And that's because of a change in quality. That's probably why you'd say you could argue that things like a phone, they seem to break down after two years. And I feel like that is kind of planned, that planned obsolescence that you might have learned about in unit one and two. That then means you have to buy a new one because they're not that great quality overall. And GDP figures are largely based on estimates, which is never great when you're trying to make decisions based on estimates. We are hoping that they are the most accurate estimates possible. And it also doesn't take into account changes in living standards. So one of the big things with changes in living standards is one of the easiest ways to increase production for a business is just have your workers work more hours. And that's not great for living standards. They might have more money, but the non material living standards are going to be worse overall, that's going to actually have negative impacts down the line, so it doesn't always take into account changes in living standards. All right, that's it for this video about the measurements of GDP and the limitations of it. If you have any questions about this, if anything's been confusing or you're unsure of it, feel free to send me a message or leave me a comment below. Send me a chat, send me an email, anything to make sure that you are doing the best you can in economics in 2020 or beyond. Other than that, make sure you check out the rest of the videos, either for this, the other Economic goals, or Area Study 3. Other than that, I hope you have an excellent day and I will talk to you next time. Goodbye.