economic growth

• Economic growth


  Increase in the economy's output of goods and services
• Types of economic growth

  • Actual growth - economy produces more goods and services
  • Potential growth - increase in the productive capacity of the economy
• Actual growth


  Making more and better use of current resources, shown by move from A to B on PPF
• Potential growth


  Increasing capacity of economy by increasing quality/quantity of factors of production, shown by outward shift of PPF
• Output gap


  When output of economy is below potential output, potential growth greater than actual growth, resulting in spare capacity
• Sustained growth


  Continued and steady increase in output, requires both potential and actual growth to occur simultaneously
• Sustainable growth


  Growth that meets needs of current generation without compromising ability of future generations to meet their needs
• Unsustainable activity is one that compromises ability of future generations to meet their needs, e.g. consumption of fossil fuels
• China's high growth rates have resulted in high pollution levels, making the growth unsustainable
• Growth is defined as increase in economy's output of goods and services, a volume concept
• Growth measurement


  % change in value of national output/national income
• National income


  Monetary evaluation of total output produced in a country within a time period, usually a year

  refers to new production only, i.e. produced in that year.
• National wealth


  Monetary evaluation of stock of money and goods that a nation's citizens own at a point in time
• Methods to measure GDP

  • Income method - calculate everyone's income and add up
  • Output method - add up value of output of every firm
  • Expenditure method - record all expenditure on new goods and services and add up
• Each GDP measurement method should give the same result as they are measuring the same thing, illustrated by circular flow of income
• Factors of production owned by households

  • Land
  • Labour
  • Capital
  • Enterprise
• Firms pay households factor incomes for use of factors of production
• Households supply firms with goods and services, money flows are blue, real flows are red in circular flow
• Income method of GDP


  Total of all factor incomes in an economy in a time period (usually one year)

  GDP = rent + wages + interest + profits
• The Output Method

  
  

  GDP is calculated by adding together the value of all new goods and services produced in an economy in a time period (usually one year).
• Components of expenditure method of GDP

  • Consumption (C)
  • Investment (I)
  • Government (G)
  • Exports (X)
  • Imports (M)
• GNP/GNI or Gross National Product

  money evaluation of income accruing to a nation’s citizens irrespective of the location of the factors of production that generated it. Usually measured over one year.
• Multinational company


  Firm that has a base of operations in more than one country
• NNP( Net National Product)


  GNP minus depreciation
• Depreciation or capital consumption is decrease in value of nation's wealth and capital stock over time
• GDP can be adjusted to real GDP and per capita to better reflect living standards
• GDP per capita can give a distorted picture of living standards as it doesn't account for income distribution
• In some countries, a small proportion of population has a large proportion of income and wealth, while majority have very limited welfare
• GDP per capita may not accurately reflect living standards, as rich and poor can live side-by-side in less developed countries
• GDP and GNP per capita are limited as measures of living standards
• GDP/GNP per capita can give distorted pictures of the level of income in a country – the income distribution is not taken into account
• A small proportion of the population can have a large proportion of the income and wealth in a country. The level of human welfare for the majority could therefore be very limited
• The poorest 10% of the population in South Africa have 1.2% of the nation's income, the richest 10% have 51.3% of the nation's income
• GDP per cap really does not show living standards
• The rich and the poor can live side by side in LEDCs
• In Kenya's capital city (Nairobi) the slum neighbourhoods are next to the 'rich' neighbourhoods. The rich depend upon the poor for house-keeping and other personal services
• It is estimated that 43.4% of the population of Kenya live below the international poverty line ($1.90 per day)
• Composition of output


  A nation may have a relatively high GDP/GNP p.c. and relatively poor living standards if the goods and services produced are not for current consumption by its citizens
• Distribution of income


  A high GNP/GDP per capita is no guarantee of adequate living standards for all of a nation's citizens. GNP/GDP per capita is an average measure. Many economies have very skewed income distributions where a tiny proportion of the population have 70/80% of national income, leaving the great majority in poverty
• Statistical problems


  In LEDCs data are often incomplete, unreliable or simply not available. They do not have the sophisticated recording mechanisms that are available in MEDCs. In addition LEDC governments do not have the resources and the expertise to accurately collect and record data. There are very few centralised institutions and communication systems are relatively basic