What is economic growth?

• Economic growth is the increase in level of output by a nation. It’s also an increase in real incomes

• National income will rise (income of the whole country’s economy)

• National income equals to (also):

  • The value of all output or production in the economy

Macroeconomic objectives:

• Controlling inflation

• Economic growth

• Balance of current account

• protect the environment

• Reducing unemployment

• Redistribution of income

Economic growth: Cycle

As output increases:

• Businesses are more profitable and share prices (the value of a company)

• makes it easier for businesses to raise more capital and employment

• higher jobs, higher income

• customers will have to make more disposable income, driving it even further

How do we measure economic growth?

• GDP. The market value of all final goods and services produced in a country over a period of time

• USD is the currency used globally, allowing easier comparisons between economic growth between countries

THe economic cycle

Boom:

• GDP grows fast

• firms expand

• more jobs, higher wages

• higher profit, higher price

• high demand

Downturn:

• economy rises, but slower

• firms stop expanding

• less jobs, prices increase slowly

• less demand

Recession:

Definition: Two consecutive quarters of negative economic growth

• high unemployment

• low business confidence, less investment

• low demand

Recovery

• GDP starts to rise

• high business confidence/consumer confidence

• high employment

Limitations of GDP as a measure of economic growth

• Inflation: Price increases mislead growth rates. If a economy grows by 5%, and prices rise by 5%, economy has not grown

• Population changes: Increase in population offsets growth in GDP, which GDP per capita is used instead

• Statistical errors: Due to high amounts of business and individuals the government collects information, mistakes can happen

• The value of home produced goods: Some goods and services (mostly private) are not traded and economic activity is not recorded

• The hidden economy: Some direct payments go unrecorded (if you get 1 euros for chores), which becomes the hidden economy

• Living standards: GDP is used to measure living standards. However, a rise in GDP doesn’t automatically mean increase in living standards have risen because it doesn’t take into account people’s leisure time, distribution of income between population, whether it increased pollution, or the quality of goods and services

• External costs: GDP does not take into account external costs such as environmental costs and impacts on the wellbeing of society