Economic Growth (Copy)

4.6.1 Definition of Economic Growth

• Economic growth = an increase in the real output of goods and services in an economy over time.
• Measured as the rise in real GDP (Gross Domestic Product adjusted for inflation).
• Distinction:
  • Nominal growth: GDP measured at current prices (includes inflation).
  • Real growth: GDP measured at constant prices (inflation removed).
• Economic growth = outward shift of the Production Possibility Curve (PPC).

Diagram: PPC Growth

       Goods (Y)
        |
        |         B (after growth)
        |        *
        |      *
        |   *
        |* A (before growth)
        |__________________________ X (Services)

Point A → Point B shows outward shift of PPC due to growth.

4.6.2 Measurement of Economic Growth

• Measured by real GDP:
  • Real GDP = value of output adjusted for inflation.
• GDP per capita (GDP ÷ population):
  • Shows average income/output per person.
  • Better indicator of living standards than total GDP.
• Growth rate = percentage change in real GDP from one year to next.

Formula (keyboard format):

Growth rate = (GDP in year 2 – GDP in year 1) ÷ GDP in year 1 × 100

Example:

• Year 1 GDP = $1000 billion
• Year 2 GDP = $1100 billion
• Growth = (1100 – 1000) ÷ 1000 × 100 = 10%

4.6.3 Causes and Consequences of Recession

• Recession = two consecutive quarters of negative real GDP growth.
• Causes:
  • Fall in total demand (consumption, investment, government spending, exports).
  • Global financial crises.
  • High interest rates reducing borrowing and spending.
  • Supply-side shocks (oil price rises, war, natural disasters).
• Consequences:
  • Unemployment rises (less demand for workers).
  • Lower output and income.
  • Government tax revenue falls.
  • Welfare payments increase.
  • Business closures and falling investment.

Diagram: Movement inside PPC during recession

       Goods (Y)
        |
        |        
        |        
        |    *
        |   (Inside PPC → underutilisation)
        |
        |__________________________ X (Services)

4.6.4 Causes of Economic Growth

• Increased investment: more machinery, factories, infrastructure.
• Technological progress: more efficient production.
• Quantity of factors of production rises: e.g. population growth, more natural resources.
• Quality of factors improves: skilled labour, better education, healthcare.
• Improved productivity: more output per worker/hour.
• Government policies: supply-side policies, stability, trade liberalisation.

Diagram: Factors shifting PPC outward

  Causes of Growth
  ├─ Investment ↑
  ├─ Technology ↑
  ├─ Labour force ↑
  ├─ Skills ↑
  └─ Productivity ↑
        ↓
  PPC shifts outward

4.6.5 Consequences of Economic Growth

Benefits

• Higher income and living standards (GDP per capita ↑).
• More employment opportunities.
• Higher tax revenue for government.
• Better public services (health, education, infrastructure).
• More international competitiveness.

Costs

• Risk of inflation (if demand grows faster than supply).
• Environmental damage (pollution, resource depletion).
• Inequality (growth benefits may not be evenly distributed).
• Structural unemployment if growth is in capital-intensive industries.
• Balance of payments deficits (if growth → higher imports).

Diagram: Balanced vs Unbalanced Growth

   Growth with Benefits        Growth with Costs
   ──────────────────         ──────────────────
   • Jobs ↑                   • Inflation ↑
   • Living standards ↑       • Pollution ↑
   • Gov revenue ↑            • Inequality ↑

4.6.6 Policies to Promote Economic Growth

Demand-side Policies (short-run growth)

• Fiscal policy:
  • ↑ government spending (infrastructure, education).
  • ↓ taxes to boost consumption and investment.
• Monetary policy:
  • ↓ interest rates → encourage borrowing and investment.
  • Control exchange rates to boost exports.

Supply-side Policies (long-term growth)

• Improve education and training (skills, productivity).
• Invest in healthcare (healthier labour force).
• Lower direct taxes (incentives to work/invest).
• Privatisation and deregulation (efficiency ↑).
• Infrastructure investment (roads, ports, energy).
• Encourage innovation (R&D subsidies).

Trade-related Policies

• Encourage exports by reducing trade barriers.
• Attract foreign direct investment (FDI).
• Join trade agreements to access wider markets.

Diagram: Policies Leading to Growth

Policies
│
├─ Fiscal Policy → Demand ↑
├─ Monetary Policy → Demand ↑
├─ Supply-side Policy → Productivity ↑
├─ Trade Policy → Exports ↑
│
↓
Economic Growth