Chapter 29

Economic Growth

X Orange Economics
 Circular Flow of Income
The circular flow of income
or circular flow is a model of
the economy in which the
major exchanges are
represented as flows of
money, goods and services,
etc. between economic
agents. The flows of money
and goods exchanged in a
closed circuit correspond in
value, but run in the
opposite direction.
Gross Domestic Products: GDP

GDP is the value of the final

goods and services
produced.
Definition: GDP
https://youtu.be/mjJmo5mN5yA
Nominal GDP

Nominal GDP measures a

country's gross domestic product
using current prices, without
adjusting for inflation. Contrast this
with real GDP, which measures a
country's economic output
adjusted for the impact of inflation.
https://youtu.be/rGqhTQyY6g4
 The Methods of Calculating GDP
GDP can be determined by summing up national income and adjusting for depreciation, taxes, and
subsidies.

GDP can be determined via three primary methods. All three methods should yield the same figure when
correctly calculated.
Value
Added:
The
difference
between the
sales
revenue
received and
the cost of
raw material
received.
The difficulty of measuring real GDP

● Small scale activities are costly to record

● Illegal activities are not recorded
● Illegal immigrants payments not recorded
● Reluctant to pay tax
● Some people do not declare their total earnings
 Recession
Effects of Recession
● A recession is a period of
declining economic
performance across an
entire economy that lasts
for several months.
● It occurs when real GDP
declines over a period of
six months or more.
Reasons of Recession
● A financial crisis. If banks have a shortage of liquidity, they reduce lending and
this reduces investment.
● A rise in interest rates – increases the cost of borrowing and reduces demand.
● Fall in asset prices – negative wealth effect leads to less spending.
● Fall in real wages – e.g. inflation outstripping nominal wage increases.
● Fall in consumer/business confidence also exacerbated by the negative
multiplier effect.
● Appreciation in exchange rate – exports less competitive.
● Fiscal austerity – when government cuts spending.
● Trade war – Global economic downturn.
 Causes of Recession: 1. Demand Side Shock
● Higher interest rates which reduce borrowing and
investment.
● Falling real wages. For example, firms cutting wages
● Falling consumer confidence, (e.g. negative series of
events causes consumers to delay spending). Lower
confidence also reduces business investment.
● Credit crunch is a sudden reduction in the general
availability of loans or a sudden tightening of the
conditions required to obtain a loan from banks
which causes a decline in bank lending and therefore
lower investment.
● A period of deflation. Falling prices often encourage
people to delay spending.
● Appreciation in the exchange rate which makes
exports expensive and reduces demand for exports.
Causes of Recession: 2. Supply Side Shock
● Higher oil prices would increase the
cost of production and causes the
short-run aggregate supply curve to
shift to the left.
● This supply-side shock causes lower
real GDP and higher inflation. This is
difficult to solve with monetary policy –
because we have both inflation and
lower output to try and solve.
Economic Growth
Economic growth can be defined as the increase or
improvement in the inflation-adjusted market value of the
goods and services produced by an economy over time.
Statisticians conventionally measure such growth as the
percent rate of increase in real gross domestic product, or
real GDP
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