Economic Growth (9)

Define Economic Growth

The increasing capacity of the economy to satisfy the needs and wants of the population.

What is Australia’s current level of economic growth

1.3% (March 2025)

What is the target range for economic growth

3 - 3.5%

How do you measure Economic Growth

GDP (Gross Domestic Product)

Define GDP (Gross Domestic Product)

Total market value of all final goods and services produced in a country during a period of time (usually a year)

What is the formula to calculate GDP from GDP data

GDP growth rate = GDPcurrent - GDPprevious/ GDPprevious x100

Define Nominal GDP Growth rate

The total market value of all goods and services produced in a country over a given period. The value of the output is expressed in the prices of the day.

How do you calculate Nominal GDP growth rate

Nominal GDP growth rate = GDP growth rate

Define GDP Growth rate

Nominal GDP growth rate that is adjusted to remove the effect of price increases.

How do you calculate the Real GDP growth rate

Real GDP growth rate = Nominal GDP growth rate - inflation rate

Define GDP per capita

Real GDP divided by the size of the population

Why is Real GDP per capita useful

Reflects the benefit of economic growth across the population and a country's standard of living

Useful when comparing one country to another because it shows relative performance

How do you calculate GDP Per capita growth rate

Real GDP per capita (RGPC) = Real GDP / Population

Real GDP per Capita growth rate = RGPCcurrent - RGPCprevious/ RGPCprevious x100

What are the 3 issues of using GDP and a measure of Economic growth

GDP only includes the value of goods and services that are exchanged for payment, GDP understates changes in utility, GDP does not account for rising productivity, and GDP does not report in working condition's.

Explain the issue in GDP of it only including the value of goods and services that are exchanged for payment

-          Activities such as housework, voluntary work, the work of charities also contribute to material welfare but are not exchanged for payment.

-          The value of these non–market goods and services is not officially estimated, hence not included in GDP

-          Means GDP understates the true value of production

Explain the issue in GDP of it understating changes in utility

-          Over time, the quality of goods and services has increased, resulting in them better satisfying the needs and wants of consumers

-          GDP only records the dollar value of these items, doesn’t account for improved quality and usefulness (utility) over time

Explain the issue in GDP of it not accounting for rising productivity (output per unit of input)

-          As knowledge and skills improve and more capital is used in production, this results in increased productivity.

-          Rising productivity has helped to deliver economic growth, and some of the benefits it delivers (increased leisure time, not affected by the GDP growth rate)

Explain the issue in GDP of not reporting in working conditions

-          If more people work overtime or hold two jobs, that will contribute towards rising GDP, but it doesn’t recognise the cost to the individual.

What other two ways can Economic growth be measured other than GDP

Measuring what matters framework, the genuine progress indicator (GPI)

Describe the Measuring What Matters Framework

-          Released by the Australian Treasury in July 2023

-          Recognises that traditional economic indicators such as GDP and unemployment are a vital part in measuring progress, but acknowledges the need to consider other well-being with this framework, selecting SD (standard deviation)

-          Its 5 wellbeing themes are: Health, Security, Sustainability, Cohesiveness and Prosperity

-          The SD indicators were selected for having consistent, comparable and reliable data, which will be used to inform general directions for government policies

Describe the Genuine Progress Indicator (GPI)

-          The GPI adjusts GDP by 26 factors that reflect some of the social and environmental costs of economic growth to give a better measure of changes in national propensity

-          These 26 factors consider the social, economic, and environmental impact of GDP

-          This measure suggests that gains in material welfare are offset by losses in other types of welfare

What are the 4 determinants of economic growth

Endowment of natural resources, population growth, labour force participation, productivity

Describe the endowment of natural resources as a determinant of economic growth with an example

-          Natural resources can potentially lead to growth if they are productive and/ or high in demand

-          Mineral and energy resources have been important contributors to Australia’s growth.

-          Example: Mining Boom (2003 – 2013) saw WA state growth rate up 8% in the early 2010s

Describe the population growth as a determinant of economic growth

-          Driven largely by net overseas migration

-          Contributes to economic growth in a variety of ways, including

o   Greater Demand for goods and services and the productive factors used to make them (including labour)

o   Increased size of the labour force results in an increase in production

o   Population growth through migration is often skilled migration and involves the transfer of wealth, knowledge and skills from overseas, which can increase the productivity of the labour force

Describe labour force participation as a determinant of economic growth

-          A high rate of labour force participation means more of the stock of human resources is being utilised, and this increases economic growth

-          Greater participation means a higher proportion of people producing goods and services and therefore earning an income

-          Increases aggregate demand and the skill level of the labour force, promoting economic growth.

-          Example: Australia's participation rate has been increasing over time, resulting in a higher portion producing goods and services and earning an income, contributing towards economic growth.

Define productivity

Productivity: Efficiency with which time organisations, industries and the economy convert factor inputs into output.

What is the Multifactor Productivity (MPF)

A Measure of economic performance that compares the amount of output to the amount of combined inputs used to produce that output.

Describe productivity as a determinant of economic growth

-          Productivity increases when output grows faster than inputs

-          Investment in capital equipment increases economic growth as it increases labour productivity

What 4 things in Multifactor productivity (MPF) influenced by?

This is influenced by

-          Capital Deepening: An increase in the stock of capital relative to the stock of other productive resources. (involves investment into better tech and improvements in labour productivity)

-          Capital Widening: Investment into capital whereby capital stock increases at an equal rate as the increase in the labour force

-          Human Capital: Development of the knowledge and skills of workers through education and experience.

-          Better management, research and development and increasing competition

 

Draw a demonstration of economic growth in a PPF and recite the explanation

Economic Growth is an increase in potential output over time and is illustrated by an outward shift of the PPF from PPF1 to PPF2. This shift of the PPF can be to a country’s endowment of natural resource, increased labour participation, increased population and/ or improved productivity (determinants of economic growth)

PPF1 represents the current output with available resources. PPF2 represents an increase in economic growth, which causes an increase in the capacity to produce both capital and consumer goods.

If the economy is functioning within the PPF (Point B) there is a GDP gap which represents the underutilised resources. The economy would want to be functioning and producing at its potential output (Point A). The movement from Point B to Point A can be reached through capital deepening.

Draw a demonstration of economic growth in a APF and recite the explanation

Real GDP increases along the Y–axis when there are increases in labour inputs along the X–axis (i.e. an increase in the labour force)

An increase in the labour force causes a movement along the APF from point a to point b. This causes an increase in real GDP from Y1 to Y3 and an increase in labour inputs from L1 to L2. Capital widening can also be illustrated with this movement along the APF, from point a to b.

Capital deepening increases productivity (driven by improvements in labour opportunity) and causes an upward shift of the APF curve from APF1 to APF2. This causes an increase in real GDP from Y1 to Y2, and a movement from points a to c, with labour inputs remaining at L1.

This increase in real GDP is larger than the increase from Y1 to Y3, and therefore, the economy would function at point c.