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Economic Growth
Economic Growth
GRADE 10
Economic growth- is an increase in the amount of goods and services
produced per head of the population over a period of time.
Measurement
The total value of output of goods and services produced is known as the national output. This can be
calculated in three ways: using output, income or expenditure.
GDP (Gross Domestic Product): the total market value of all final goods and services provided within an
economy by its factors of production in a given period of time.
Nominal GDP: the value of output produced in an economy in a period of time, measured at their current
market values or prices is the nominal GDP.
Real GDP: the value of output produced in an economy in a period of time, measured assuming the prices are
unchanged over time. This GDP, in constant prices, provides a measure of the real output of a country.
GDP per head/capita: this measures the average output/ income per person in an
economy. Since this takes into account the population, it provides a good measure
of the living standards of an economy.
GDP per capita = GDP / Population
An increase in real GDP over time indicates economic growth as goods and
services produced have increased. It indicates that the economy is utilizing its
resources better or its productive capacity has increased. On a PPC, economic
growth will be shown by an outward shift of the PPC, which is also called ‘potential
growth’. ‘Actual growth’ occurs when the economy moves from a point inside the
PPC to a point closer to the PPC.
This diagram shows ‘actual
growth’ as the economy realizes its
potential growth. In order to
experience potential economic
growth, the PPC would have to
shift outwards.
Recession
Recession is the phase where there is negative economic
growth, that is real GDP is falling. This usually happens after
there is rapid economic growth. High inflation during the boom
period will cause consumer spending to fall and cause this
downturn. Workers will demand more wages as the cost of living
increase, and the price of raw materials will also rise, leading to
firms cutting down production and laying off workers.
Unemployment starts to rise and incomes fall.
Causes of recession:
•Financial crises: if banks have a shortage of liquidity, they reduce lending and this reduces investment.
•Rise in interest rates: increases the cost of borrowing and reduces demand.
•Fall in real wages: usually caused when wages do not increase in line with inflation leading to falling incomes and
demand.
•Trade wars: uncertainty in markets, and thus businesses will be reluctant to invest during a trade war, causing
supply to fall.
•Supply-side shocks: e.g. rise in oil prices cause inflation and lower purchasing power.
•Black swan events: black swan events are unexpected events that are very hard to predict. For example, COVID-
19 pandemic in 2020 which disrupted travel, supply chains and normal business activity, as well consumer demand,
has caused recessions in many countries.
Consequences of recession:
•Firms go out of business: as demand falls, firms will be forced to either reduce
production to a level that is sustainable or close shop.
•Scarce resources are used up rapidly when production rises. Natural resources may get
depleted over time.
•If the economy produces over its productive capacity and if the growth in demand outstrips the
growth in output, economic growth may cause inflation
•Economic growth has also been accused of widening income inequalities in developing
economies, because rich investors and businessmen gain more than the working class and poor
during growth – the benefits of growth are not evenly distributed. This will cause relative
poverty to rise.
Governments aim for sustainable economic
growth which refers to a rate of growth which can
be maintained without creating significant economic
problems for future generations, such as depletion of
resources and a degraded natural environment .