Economic Growth

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Measurement of economic growth

Can be measured by change in national output over a period of time

National output is all goods and services produced by a country- Measured by value of GDP

Rate of economic growth is speed at which national output grows over a period of time

Long periods of high economic growth called booms

Negative economic growth for two consecutive quarters, called a recession

long recession known as a slump

Economic depression- sustained economic downturn which lasts for long period of time

Over one year, country GDP may increase or decrease. Measures the change in amount of goods and services produced between years. Can be shown as a value in money or as a percentage - Change in GDP/ Original GDP x 100 = Percentage change

Nominal GDP- GDP figures which hasn't been adjusted for inflation - misleading figure

Real GDP- effect of inflation removed

GDP indicates SOL - GDP PER CAPITA

Use GNI which is GDP plus net income from abroad

Use GNP which is total output of citizens of country

Purchasing Power used to compared Living standards

- exchange rate might not reflect true worth

-comparisons carried out using PPP principle

-Purchasing power is the real value of amount of money in terms of what you can buy with it- vary between countries

GDP figures dont take into account:

Hidden economy

Public Spending

Extent of income inequality

Differences in SOL between countries

Index Numbers

Used to make comparisons over time

First Year- Base Year- index number set up at 100

Economic Growth is an increase in the productive potential of an economy

Short run- economic growth measured by % change in real national output- known as actual growth

The increases in actual growth are usually due to an increase in aggregate demand but can be caused by increase in aggregate supply- fluctuates up and down

Long Run growth is caused by a increase in the capacity or productive potential of the economy. This is caused by an rise in the quality or quantity of inputs(factor of production)

Long run growth is shown by an increase in the trend rate of growth

The trend rate of growth is the average rate of economic growth over a period of both economic booms and slumps Rises smoothly rather the fluctuating like actual rate of growth

Long Run growth increases are caused by increases in aggregate supply

PPF diagram can show economic growth

Both Short run and Long Run economic growth can be shown on PPF

Short run growth shown by a movement

Long run growth occurs if there an increase in the capacity of the economy- PPF shifts outwards

Economic Cycle

- Different phases

-Actual growth of economy fluctuates- known as the economic cycle

- Boom occurs when economy is growing quickly- AD rising, causing a fall in unemployment- rise in inflation

-Recession is when negative economic growth for at least two consecutive quarters- AD falling, unemployment will rise, fall in price levels

- In recovery, economy grows from negative economic growth to positive economic growth- AD rising, unemployment falling, rise inflation

Negative output gap- difference between level of actual output and trend output when actual output below trend output.

- occur during recession when economy is under-performing. This means resources will be unused or underused

- cause downward pressure on inflation

Positive output gap- difference between level of actual output and trend output, with actual output above trend output

-occur during a boom when economy is overheating- resources being used fully or overused

-upward pressure on inflation

Recovery- economy will go from having a negative output gap to having positive output gap was actual output rises above trend output

Output can be shown on PPF `and on AS/ AD diagram

Benefits of Economic Growth

Increase demand for labour- fall in unemployment

Means firms succeeding, employees may get higher wages

Firms earn greater profits, can invest into new technology

Produce more, improve countries BOP as sell more exports

Government tax revenue increases- as wages and employment rises

Improve governments fiscal position- spend less money on benefits

Bring improvements for environment- firms may have resources to invest in cleaner and efficient production

Costs of Economic Growth

Create income inequality - low skilled works find it harder to get higher wages

More responsibilities given to employees at work

Could cause demand pull inflation as causes demand to increase faster than supply

Could cause cost push inflation as demand for resources increase which pushes their prices up

Deficit on BOP as people on higher incomes buy more imports

Industrial expansion may have negative externatlies such as pollution and increased congestion

Beautiful scenery and habitats can be destroyed when resources are over-exploited

Finite resources may be used up in creation of economic growth

Recession Bad

Many firms close down- lose jobs

Firms stop hiring new employees

Government spending increases

levels of investment fall

discount retailers can benefit

Recessions force firms to face up to their inefficiencies. This is because will need to cut costs to survive a recession

Short run economic growth created by increase AD

Increase in AD caused by demand-side factors such as monetary lowering interest rates and fiscal policy of increasing welfare benefits

the amount AD shifts depends on marginal propensity to consume and how big the multipler is

Higher the MPC and the bigger the multiplier, greater the shift to the right of AD curve

Short run aggregate supply increases creates short run growth

- risse in short run aggregate supply create short run economic growth

Factor which reduces production costs will increase SRAS such as fall in price of oil and fall in wages

Long run economic growth

Long run economic growth is the result of supply side factors that increase productive potential of the economy

Productive potential can be increased by raising quantity or quality of factors of production. These include through innovation, investing in modern machinery, raising agricultural output by using genetically modified cribs, increasing spending on education and training to improve human capital, increase the population size.

Increase in productive potential shifts the lras curve to the right

government help to create long run economic growth by creating stability in a country