Economic growth

Economic growth is a sustaine incerase of the country’s real GDP over a specific period of time. It is also expressed as annual percentage change in the real national output. Could be also interpreted as sustained increase in the potential productive capacity of the economy. Occurs when there is an increase in the quantity or quality of the economy’s factor of production.

@@Real life example: Canada GDP Growth Rate The Canadian economy expanded 0.7% on quarter in Q3 2022@@

@@The US economy grew an annualized 3.2% on quarter in Q3 2022@@

Negative economic growth occurs when there is fall in real GDP that could be associated with recession.

Reason for various rates of economic growth in the countries:

  1. Factors endowment - the more resources the country posses thera are more likely to achive economic growth
  2. The size and skill of labour force - more highly educated and qualificated workers results in higher economic growth.
  3. Invetstment expenditure - countries that invest higer proprotion of their GDP in capital investments are more likely to achive econoic growth.
  4. Discovery of raw materials
  5. Labour productivity - refers to the output produced in a given time period.
  6. Mobility of labour - refers to extent to which workers are willing and able to switch a job.

Short term growth

Actual output refers to current real GDP.

Actual growth refers to a short term growth which occurs when the economy moves towards its potential GDP by using more resources efficiently. Economy operates below its full employment level, however it move towards its potential level of GDP. Measure by annual percentage change of potential output. An increasing AD can cause high rates of inflation as the economy overheats. Therefore, boosting AD is not a sustainable solution for long-term economic growth.

Long term growth

Potential output refers to the possible level of real GDP if all resource would be used efficiently. Represented by outward shift of the PPC curve.

Three factors of production that determinesthe possibility of economy is land, labour and capital.

Ecological degradation can also be significant for long-term economic growth e.g fish depletion in the sea will reduce the output of the fishing industry fishermen, and farmers working on soil with poor quality will produce less.

Rate of economic growth = (Real GDP year 2 − Real GDP year 1)

Real GDP year 1 ×100

Annual economic growth - annual rate of change of monetary value of GDP expressed in current prices.

Real economic growth - annual rate of change in the value of nominal GDP, after accounting inflation (changes in price levels)

Consequences of economic growth

  1. Impact on living standards - economic growth has the ability to increase people's incomes with increases in output. It contributes to reduction of absolute poverty. Creation of new jobs results in lower unemployment level. Increased tax revenues helps governemnt to provide more mertit goods and services. Increased consumer spending contribute to higher revenues of firms. Higher risk of inflation

  2. Impact on environment - many countries have achieved high rates of economic growth with industries based on the extraction of resources, such as crude oil, trees, minerals, and so on. Many new technologies could be non - renewable and will not be avaliable for future generations.

    Green GDP - adjust the country GDP to take account of the value of environmental degradation.

  3. Impact on income distribution - economic growth creates greater disparities. That widening the gap between extremely poor and rich people. And it does not resolve problems like income inequalities. Only tax revenues allows government to redistribute the income in the economy.