Perhaps the most important way in which we try to evaluate the performance of an economy is through economic growth. The wellbeing of the residents of an economy depends partly (but not exclusively) upon the resources available to them, and if we are looking to see whether wellbeing is improving through time, we need to be able to monitor whether the availability of resources is increasing as time goes by.
One common measure of resource availability is gross domestic product (GDP), or gross national income (GNI). GDP can be calculated in one of three ways — as the sum of incomes, output or expenditure. Whichever approach is taken, there is a common problem — the only unit of measurement that can be used is money. For example, we can only add together the output of the various industries and other sectors that produce output in the UK economy by having money as a common unit of measurement. The problem with this is that prices change over time, so the value of our unit of measurement (£1) changes through time.
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