Unit 2.1: Government and the Economy – Chapter 25: Economic Growth

GOVERNMENT AND THE ECONOMY

Understand macroeconomic objectives.
Understand how to define economic growth.
Understand how GDP is used to measure economic growth.
Understand the limitations of using GDP to measure economic growth.
Understand the economic cycle: boom, downturn, recession, and recovery.
Understand the impact of economic growth on employment, standards of living, poverty, productive potential, inflation, and the environment.

Budget Deficit: The amount by which government spending is greater than government revenue.
Macroeconomics: The study of large economic systems such as those of a whole country or area of the world.
Microeconomics: The study of small economic systems that are part of national or international systems.
Economic Growth: The increase in the level of output by a nation.
National Income: The value of income, output, or expenditure over a period of time.
Gross Domestic Product (GDP): The market value of all final goods and services produced in a period (usually yearly), an internationally recognized measure of national income.
Productive Potential: The maximum output that an economy can produce when using all of its resources efficiently.

The Canadian Liberal Party, led by Justin Trudeau, aimed to grow the economy by investing in public infrastructure projects.
By the end of 2016, national income had only grown by 1.2% compared to a growth of 0.9% in 2015.
Discussion points:
1. Analyze whether Trudeau's policies are yielding the expected outcomes.
2. Consider how these policies might create jobs in Canada.
3. Reflect on the importance of economic performance to government policies.
4. Engage in discussions about the current state of the economy in various countries.

Economic growth reflects an increase in national income, which includes:
- Wages
- Profits
- Royalties
- Dividends
- Interest
- Income generated abroad
National income is also equal to the total value of all output or production in the economy.
Increased economic activity leads to higher business profits, which then fuels job creation and consumer spending, driving further economic growth.

GDP per Capita: Can offer more accurate insights into economic performance.
- If GDP grows by 2.8% but population also rises, it can offset GDP growth.
GDP per capita is calculated as:
ext{GDP per capita} = rac{ ext{GDP}}{ ext{Population}}
Example: In 2015, GDP per capita was US$35,079 in the EU and US$1,133 in Kenya.

Statistical Errors: Due to the massive data collection involved, inaccuracies can occur, leading to underreporting or overreporting of GDP.
Non-Traded Goods: Economic activities that do not involve trade, like home gardening or DIY work, are not included in GDP calculations.
Hidden Economy: Transactions occurring informally (e.g., cash jobs) are not recorded, missing out on economic contributions.
Inflation Adjustment: Real GDP must be accounted for inflation. For instance, if nominal GDP growth is 4.4% and inflation is 2.3%, then the real GDP growth is:
ext{Real GDP Growth} = ext{Nominal GDP Growth} - ext{Inflation} = 4.4 ext{ ext{%}} - 2.3 ext{ ext{%}} = 2.1 ext{ ext{%}}

On Employment: Increased economic activity generates jobs, aiding in reduced unemployment.
On Standards of Living: Higher GDP typically leads to better living standards due to more disposable income, resulting in:
- Better food, housing, and leisure time.
- Improved life expectancy due to advances in health and diet.
On Poverty: Economic growth can alleviate poverty by increasing job creation and greater tax revenues for government spending on social services.
On Productive Potential: Economic growth expands a country's productive capabilities, represented by increased quantities of capital and consumer goods, shifting production possibility curves (PPC) to the right.

Boom: Characterized by rapid GDP growth, rising demand, and employment but potentially rising prices.
Downturn: GDP growth slows; demand, profits, and investment begin to decrease.
Recession (or Depression): Economic decline where GDP falls consistently for two quarters, often leading to increased unemployment and poverty.
Recovery: GDP begins to rise again, leading to increased demand and employment as confidence returns.

India experienced high economic growth with GDP reaching 11% in 2010. Benefits included:
- Improved literacy rates, from 64.8% to 74.04% between 2001 and 2011.
- Decreased infant mortality from 80 per 1000 live births in 1991 to 50 in 2009.
- Life expectancy rose from 55.7 years to 64.2 years.
- Government employment initiatives, such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, provided many jobs.

Inflation relates to economic growth, as fast growth can lead to an overheated economy, resulting in inflation. Economic growth must be balanced against these inflationary pressures.