Economic Growth

19/10/2023

Economic growth is the annual increase in the level of national output produced by head as measured by the GDP & gross domestic product.
It increases the standard of living.

Economic growth can be calculated in three ways: output method, income method and expenditure.

National Output: the total value of output produced.

GDP: total market value of all final output provided in an economy.
Nominal GDP: value of output produced in an economy in a period of time without adjusting the price of inflation.
Real GDP: value of output produced in an economy in a period of time with adjusting for inflation.

GDP per head / capita:

This measures the average output / income per person in an economy. Since it takes into account the population, it provides a good measure
of the living standards of an economy.
expanding productive
Achieving Economic Growth potential

• The discovery of more natural resources

• Investment in capital , technology and infrastructure
• Technical progress
• Increasing the amount and quality of human resources
• Reallocating resources
• Increase in the quantity or quality of factors of production
Quality of labour can be improved through impact of training and education. An educated workforce is more productive and production possibilities increase.
Quantity can be increased through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase.
• Change in total demand
If any component of real GDP increases (consumption, investment, govt. spending, net exports), there will be an increase in total demand.

Benefits of economic growth

• Increased incomes lead to better standards of living
• Decreased levels of absolute poverty; reduced expenditure by govt. on unemployment benefits
• Increased employment resolves negative social impacts of unemployment.
• Higher sales revenue for firms and greater profits
• Increased investment by firms increase the potential output of the economy
• Higher govt. tax revenue due to rising incomes and surging corporate profits
• Improvement in the quality/quantity of technologies
• Low & stable inflation, if growth in output matches growth in demand

Consequences of economic growth

• Rising total demand causes demand pull inflation & the purchasing power of people on fixed incomes may fall
• Inequalities will arise in the distribution of income - the rich may get richer and the poor poorer
• Increased income usually leads to greater consumption of harmful goods
• Negative externalities of production
• Increased inflation
• Level of imports usually increases negatively impacting the current account
• Resources are depleted more rapidly
• Unemployment may rise as technical progress can cause capital to replace labour.

Economic boom: Demand for goods and services rise faster than output can rise
Profits peak and prices rise as economy 'overheats'

Economic recession: Real GDP , profits and incomes and demand for goods and services fall
Firms cut their production and lay off workers

Economic recovery: Real GDP grows faster than normal. Demand for goods and services rise rapidly.
Firms increase output and hire more workers. Profits and other incomes rise.

Slump: A period when output slows down due to a reduction in demand. Confidence may begin to suffer.
 Causes of recession
• Fall in factors that influence total demand (consumption, investment, govt spending, net exports)
• Supply-side shocks
• Rise in interest rates
• Fall in real ages
• Fall in consumer / business confidence
• Industrial action
• Cut in govt expenditure
• Black swan events

Consequences of recession
• GDP falls
• Fall in income
• Rise in poverty and inequality
• Firms go bankrupt / out of business
• Permanently lost output
• Unemployment increases
• Exports and imports fall
• Investments by firms decreases
• Govt expenditure on unemployment benefits increase (higher budget deficit)
• Youth unemployment increases

Policies to promote economic growth

Demand-side policies
• Expansionary fiscal policies
• Expansionary monetary policies
Supply-side policies they can take a
considerable
• Reduction in taxation time to work.
• Subsidies
• Improving educational & vocational training
• Deregulation