Economic Growth | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)
4.6.1 Definition of Economic Growth
- Economic Growth is the increase in the real output (GDP) of an economy over time.
- It represents an expansion in the productive capacity of the economy.
- Measured as the percentage change in real GDP (adjusted for inflation).
4.6.2 Measurement of Economic Growth
A. Real Gross Domestic Product (GDP)
- Real GDP: Total value of all final goods and services produced in a country, adjusted for inflation.
- Used to compare economic growth year to year.
B. GDP Per Capita (Per Head)
- GDP per capita = Real GDP / Total Population
- Indicates average income level and standard of living.
Use in Measurement:
- Rising real GDP = Economic growth.
- Rising GDP per capita = Improvement in average living standards.
Note: Real GDP growth doesn’t always mean better welfare (e.g., pollution, inequality, unpaid work not included).
4.6.3 Causes and Consequences of Recession
Definition of Recession
- A recession is a period of at least two consecutive quarters of negative economic growth.
- Characterized by falling output, income, and employment.
Causes of Recession:
- Fall in Aggregate Demand:
- Decreased consumer spending.
- Higher interest rates.
- Fall in exports or investment.
- Global Economic Downturn
- Recession in trading partners reduces demand for exports.
- High Inflation
- Reduces real incomes and consumer purchasing power.
- Financial Crisis
- Reduces lending and consumer/business confidence.
Consequences of Recession:
| Effect | Impact |
|---|---|
| Unemployment | Increases sharply as firms cut costs. |
| Business Closures | Especially for small or uncompetitive firms. |
| Lower Tax Revenue | Government collects less from income/profit taxes. |
| Increased Welfare Spending | More people claim unemployment benefits. |
| Falling Investment | Businesses delay or cancel expansion. |
| Consumer Confidence | Declines, worsening the economic spiral. |
Recession and PPC
- Inside the PPC: Underutilization of resources due to high unemployment and idle capital.
- Movement toward PPC: Rebound in demand increases GDP without increasing capacity.
4.6.4 Causes of Economic Growth
Short-Run Growth (Utilization of Existing Resources)
- Increase in aggregate demand (AD) due to:
- Higher consumption, investment, exports.
- Expansionary fiscal or monetary policy.
- Improved business confidence.
Long-Run Growth (Increase in Productive Capacity)
- Caused by rightward shift in Production Possibility Curve (PPC).
Factors Behind Long-Run Growth:
| Factor | Explanation |
|---|---|
| Investment | In capital goods increases productive capacity. |
| Technology | Improves efficiency and output per worker. |
| Quantity of Labour | More workers = higher output potential. |
| Quality of Labour | Education, training → better skills/productivity. |
| Natural Resources | New discoveries or improved access. |
| Entrepreneurship | Innovation and risk-taking drive new production. |
4.6.5 Consequences of Economic Growth
A. Benefits
| Benefit | Description |
|---|---|
| Higher Employment | More output = more jobs. |
| Higher Incomes | Improved standard of living. |
| Increased Tax Revenue | Without raising tax rates. |
| Lower Poverty | Growth can lift people out of poverty. |
| Increased Investment | Businesses reinvest profits. |
B. Costs
| Cost | Description |
|---|---|
| Inflation | If demand outpaces supply, prices rise. |
| Environmental Damage | Deforestation, pollution from overproduction. |
| Inequality | Growth may benefit the rich more than the poor. |
| Resource Depletion | Overuse of non-renewable resources. |
| Urban Problems | Congestion, housing shortages in growing cities. |
Context Matters
- In developing economies, growth can bring rapid improvements in living standards.
- In developed economies, growth may lead to diminishing returns and more environmental harm.
4.6.6 Policies to Promote Economic Growth
A. Fiscal Policy
- Increase government spending on infrastructure, education, health.
- Cut taxes to stimulate consumption and investment.
B. Monetary Policy
- Lower interest rates: Encourages borrowing, investment, and consumption.
- Increase money supply to support economic activity.
C. Supply-Side Policies
- Education and Training: Improve quality of labour.
- Deregulation: Encourage business competition.
- Privatisation: Boost efficiency in state-owned enterprises.
- Tax Incentives: For R&D or business expansion.
- Investment in Technology and Infrastructure
Effectiveness Depends On:
| Factor | Influence |
|---|---|
| Time Lag | Some policies take years to show impact. |
| Government Budget | Limited resources may restrict spending. |
| External Shocks | Global crises can overpower domestic policies. |
| Political Stability | Consistent policy-making matters. |
| Implementation Efficiency | Poor governance can ruin good policies. |
Exam Tip
- Use PPC diagrams:
- Movement from inside to boundary: Recovery from recession.
- Outward shift: Long-term growth.
- Differentiate clearly between short-run and long-run growth.
- Link causes and policies to real-world examples (e.g., China’s infrastructure boom).
- Show balanced evaluation: growth has benefits, but comes with trade-offs.
