Economic Growth

How to measure Econ Growth?

Through GDP

What is GDP?
Total output of a country
Gross = Total
Domestic = Everything produced inside your
boundaries
Product = Output
 How to calculate GDP?
Output Method
• Calculated by adding up all the output
produced by all the industries in the country
Problems
• Double counting of output .
Solution
• Use the value added method
Income Method
• By adding up all the incomes which have been earned in
producing the country’s output

Problem
• We have to exclude transfer payments as they do not
contribute to output
• E.g Unemployment benefits and pensions
• There is no corresponding output of goods and services
in transfer payments so we cannot count them in GDP
Expenditure Method
• Caluclates GDP by adding up all the
expenditure on the country’s finished output
Total Expenditure = C+I +G +( X-M)
Problem
We must add exports and subtract imports
 Difference in Nominal and Real GDP
• Nominal GDP is money GDP or GDP which is
not adjusted for inflation

• Real GDP is GDP adjusted for inflation

• Nominal GDP could be seriously misleading

Real GDP per head
 The difficulties in measuring real GDP

GDP measures tend to understate the true level

of output
Why?
1. Unrecorded economic activity
2. Non-marketed goods and services
Why is some economic activity unrecorded?
• Activity is on a small scale and business
registration costs are high
• It is illegal e.g drugs
• Work done by illegal immigrants
• Undeclared income to avoid taxes
• Smuggling
• Some businesses stay unregistered to avoid
government regulations
Non Marketed Goods and Services
• Subsistence farmers
• People who clean their own homes, cook
their own food and repair their own cars
 Recession
• GDP falls consecutively for 6 months
How does a recession take place?
• Fall in AD  GDP down
Why could AD Fall?
• Bad security led to bad confidence and hence less
investment
• Fall in AS
Why could AS fall?
• Rise in price of fuel or other raw materials
 Consequences of a recession
• Unemployment
• Lesser incomes  Low living standards
• Recession discourages foreign investment 
endanger future economic growth
• If recession is due to fall in supply it will cause
inflation
• Tax revenue will decline  Budget deficit
 Growth
• GDP consistently grows
How does growth take place?
• AD rises
Interest rate low
Increased consumer confidence
Low tax leads to higher consumption and
investment
Foreign investment
• AS rises
 How to increase AS
• Increase Quantity of resources
Discoveries
Encourage business to come your country
Relax immigration laws
• Increase Quality of resources
Education
Training
Importing new technology
 Consequences of Growth
1. Growth  Incomes increase and
Employment increase  Have access to
greater facilities  Living standards increase
2. Poor start to afford basic necessities ,
healthcare and education
3. Rich can now afford luxuries
4. Higher output leads to more tax revenue so
government can spend more on healthcare and
education
5. Governments can now work on eradicating
poverty

6. Pay debts
7. Governnments economic and political standing
imporoves
 Disadvantages of growth
Opportunity Cost
• Achieving high growth involves shifting
resources to capital goods which could reduce
living standards
• Pollution due to industries
• Could lead to demand –pull inflation
• Depletion of non-renewable resources ( over
fishing, over mining , deforestration)
• Over consturction could destroy wildlife
habitats
• Increases stress of workers
• Higher incomes lead to higher imports which
causes domestic industry to cripple
 How to achieve growth
• Expansionary fiscal policy
Lower taxes and high spending

Low taxes encourage investment hence more

jobs and more consumption because firms get
to keep more of their profits
• Expansionary monetary policy
Low interest rate and increase money supply

Firms can borrow more funds , increase their

size,more jobs and hence more consumption

Firms borrow more because cost of borrowing is

low