[2.1.1a.] Economics - Economic Growth

What is economic growth?

An increase in the value of goods and services produced by an economy over time.

What is economic growth measured in?

GDP

How is the rate of economic growth calculated?

Rate of Economic growth = (change in GDP between year 1 and year 2 )/(GDP in year 1) x 100

How is GDP per capita worked out?

GDP/population

What are some of the limitations of GDP as a measure of growth?

Hard to measure the value of all goods and services

Unregistered businesses aren't counted

Doesn't mean wealth is distributed fairly

Does not reflect quality of life

Population may increase meaning GDP rises yet GDP per capita does not change (no standard of living increase)

Statistical errors

Inflation

What is a boom?

A period where real national output is rising at a rate faster than the trend rate of growth.

What are some of the effects of a boom?

Fast growth of consumption because of rising income and strong confidence

Increase in business demand for capital goods to meet consumer demand

More jobs created

High import demand

Rise in govt. tax revenue

Inflationary pressure

What is a slowdown?

A slowdown occurs when the rate of growth decelerates - but natural output is still rising.

What is a recession?

A recession means a decrease in the level of real national output - a period when growth is negative.

It has to last at least 2 quarters to technically qualify as a recession.

What are the indicators of a recession?

Fall in purchases of capital goods and raw materials

Rising unemployment

Rise in business failures

Decline in business and consumer confidence

Contraction in consumer spending

Drop in value of exports and imports

What is a recovery?

This is when real GDP picks up from the low point of a recession.

How does economic growth cause a rise in living standards?

As GDP rises, individuals should experience an improvement in their material standard of living as real GDP per capita rises.

For example, citizens may be able to afford a wider range of luxury goods and services.

How does economic growth lower unemployment?

As an economy grows and the demand for goods and services rises, firms will demand more labour to provide those goods and services.

How does economic growth reduce poverty?

As average incomes rise this should also be accompanied by a reduction in poverty.

How does economic growth effect a government's financial position?

As more jobs are created, this should improve the government's finances as more money is raised through income tax and less paid out in benefits.

Some of this revenue may be used to pay off debts or be re-invested into the economy e.g. through infrastructure projects or the provision of merit goods

How can economic growth create negative externalities?

Economic growth often involves damage to the environment, pollution and congestion, all of which can be argued to reduce living standards.

How can economic growth cause scarcity of resources?

The faster an economy grows, the faster it uses its non-renewable resources e.g. oil coal and gas.

We want to leave resources for the future generation so they have the same living standards.

The faster these resources are depleted the less sustainable economic growth is.

How can inequality arise as a result of economic growth?

It is unlikely that the benefits of economic growth will be distributed evenly.

If so, then inequality will worsen and potentially create larger divides in society as the gap between rich and poor widens.

How can economic growth create inflation?

As scarce resources reduce and demand increases due to rising incomes this creates inflationary pressure in an economy.