2.25 Economic Growth

What are the macroeconomic objectives?

• Reducing unemployment

• Protect the environment

• Balance of payments

• Economic growth

• Controlling inflation

• Redistribution of income

Macroeconomics

Study or large economic system such as in a whole county or an area of the world

Microeconomics

Study or a small economic system in a nation or an international nation

What is economic growth?

It is the increase in the level output of a nation.

How is national income measured?

GDP (Gross Domestic Product)

GDP measures a country’s total output for a year.

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

Inflation:

• Prices increasing can mean growth rates are misleading.

• Can be overcome by using real GDP which is adjusted for inflation

Population changes:

• Population growth should be taken into account

• Can be overcome by using GDP per capita

Statistical errors:

• Gathering data can be hard and can require money. Information can also be entered incorrectly, inaccurately or left out

The value of produced goods:

• Some goods and services are not traded and therefore economic activity is not recorded

• This means that the value of national income is underreported

The Hidden Economy:

• Sometimes paid work goes unrecorded

• This transaction becomes part of the “black” or “informal” economy

GDP and living standards:

• Just because GDP rises, it does not mean that living standards have also risen

• GDP does not take into account

  • Amount of leisure time that people have

  • The way that extra income is shared between the population

  • Whether growth has resulted in pollution

  • The quality of goods and services

External costs:

• GDP does not take into account external costs and how they impact society

What are the causes of economic growth

Productivity:

• Labour productivity: workers’ efficiency

• Capital efficiency: money working harder, Return on investment

Labour:

• Quantity of workforce: investment in people

• Internal migration: People with skills moving into the country

• Improved healthcare and nutrition (in developing countries)

Capital:

• Investment in new machinery

• Research and development: new more efficient methods of production

What are the disadvantages of increase in capital?

Capital replaces labour, so if capital increases, demand for labour decreases. This causes a rise in unemployment.

Economic cycle:

What is the formula for aggregate demand?

AD = C + I + G + (X- M)

C= consumption

I= investments

G= government spending

X= exports

M= imports

What is the boom? (economic cycle)

It is the peak of the cycle where GDP is growing at its fastest

What is the downturn? (economic cycle)

It is the period where GDP grows but more slowly

What is the depression or slump? (economic cycle)

It is the bottom of the economic cycle where GDP starts to fall with significant increase in unemployment.

What is the recession? (economic cycle)

It is the period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in 2 successive quarters.

What is recovery? (economic cycle)

It si when the GDP starts to rise again

What is the impact of the boom on growth, employment and inflation?

• GDP is growing fast as the economy is performing well

• Firms will expand

• New firms entering markets

• Demand will rise (for both products and labour)

• Wages and profit will rise

• Prices will also rise

What is the impact of the downturn on growth, employment and inflation?

• Economy is still growing but at a slower rate

• Demand for goods and services will stop increasing and/or start to fall

• Unemployment will start to rise

• Wage increases will start to slow down

• Firms will stop expanding

• Profits may fall

• Some firms will leave the market

• Prices will rise more slowly

What is the impact of the recession or depression on growth, employment and inflation?

• GDP may be flat

• If GDP starts to fall → depression/slump

• Dp/slump → widespread poverty

• Demand will fall (for mostly non-essentials)

• Unemployment will significantly rise

• Business confidence is low

• Prices may fall

• Depression is more severe than recession

What is the impact of the recovery on growth, employment and inflation?

• Business and consumer confidence is renewed

• Economic activity will increase

• Demand rises

• Unemployment falls

• Prices start to rise again

What is the impact of economic growth on employment?

• Business generates more output

• Resulting in the need for more labour

• Employment levels raise

• Reduces unemployment

• Gov also spend more

• Increased gov spending → more job opportunities

What is the impact of economic growth on living standards?

• Average people have more income

• More income → more disposable income

• People buy better quality goods/services

• As the economy grows, people spend less time working

• Because of improved efficiency

What is the impact of economic growth on poverty?

• Rapid economic growth helps reduce poverty

• Economic growth → business creation + expansion → more jobs → reduced unemployment

• Gov tax income increases → more spending on healthcare + education + infrastructure

What is the impact of economic growth on productive potential?

• raises PP

• The country can produce more goods/services

What is overheating in a economy?

It is when demand rises too fast, causing prices and imports to rise.

What is the impact of economic growth on inflation?

• If economic growth is too fast → overheat

• Overheat → inflation

What is unsustainable growth?

It is economic growth that is not possible to sustain without causing environmental problems

What is the impact of economic growth on the environment?

• Growth can causes pollution

• Can use non-renewable resources

• Resources will eventually run out