3.1 Economic growth

Economic growth

increase in a country's total output or productive capacity over time

Gross Domestic Product (GDP)

The value of goods and services produced in the economy over time (nominal GDP)

Real GDP

The value of goods and services produced in the economy over a period of time taking into account inflation

GDP per capita

GDP divided by population

How to calculate GDP per capita

GDP/population

How is economic growth measured?

Using the annual percentage change in a country's GDP and comparing with past values and trends along with other similar countries values

How is the rate of economic growth measured with reference to GDP and GDP per capita?

Rate of growth = (change in GDP/ Original GDP) ^ 100

Boom

A period of high economic activity and high levels of employment

Recession

A period where the country's GDP falls for two (or more) consecutive quarters

What are some examples of recessions when analysing recent and historical GDP data?

1. 2008 and financial crisis

2. 2020 pandemic downturn

Economic growth is the result of...

...the economy being able to increase its output (this output is created by the factors of production)

What are some determinants for increases in short run economic growth?

1. Increase in aggregate demand (eg: increase in consumer spending, investment by firms, government spending or exports)

2. Increase in short-run aggregate supply (eg: any reduction in the cost of production [wages, raw materials, taxes/subsidies, exchange rates])

What are some determinants for an increase on long run economic growth?

1. Increase in productive capacity of economy (increase in long-run aggregate supply)

This can occur if there are changes in the quantity or quality of the factors of production

What are the determinants of economic growth?

1. Investment (expenditure on capital equipment)

2. Changes in technology

3. Education and training

4. Size of the workforce

5. Availability of Natural resources

6. Government policies

How does investment increase economic growth?

Investment in capital means firms will have a greater production capacity, and will be able to produce more in the future

How do changes in technology increase the economic growth?

Changes in technology means that newer capital equipment is more efficient and are therefore able to produce greater output than older equipment

How does education and training increase economic growth?

Better educated people are more productive and so as education standards improve the level of output that is possible also improves

How does the size of the workforce increase economic growth?

More workers means that firms can produce more goods and services

How does the availability of natural resources increase economic growth?

Greater supply of resources means there is a greater ability to produce, as the cost of production is lower and there is a greater incentive for firms to produce goods and services

How do government policies increase economic growth?

Investment in infrastructure (airports, rail and road) could greatly reduce transport costs, increasing overall ability to produce

What is thought to be the most effective market for allocating resources?

Market economy (that leans heavily on the market forces of supply and demand to allocate resources)

Benefits of Economic growth

1. Rise in material living standards (higher GDP means higher GDP per capita).

2. Reduction in poverty - due to increases in VAT and income tax - improving benefits scheme or social housing. (And rises in average incomes)

3. Rise in the welfare of the population (increased quality of public services e.g: schools, healthcare).

4. Less unemployment - increased demand for labour in order to increase output.

5. Improvements in governments financial position - more Jobs -> higher income tax revenue and less benefits

(Some revenue may be used to pay-off debts)

Costs of Economic growth

1. Negative externalities (eg: congestion, damage to the environment, pollution)

2. Depletion of scarce and non-renewable resources (not sustainable)

3. Inequality - potential larger divides between rich and poor, as benefits of economic growth will not be spread out equally

4. Inflation - supply may not be able to keep up with increased demand , leading to DEMAND PULL INFLATION. (Due to depletion of scarce resources and high demand due to rising incomes)