7.5 - Economic change

• GDP (Gross Domestic Product)


  The total market value of goods and services produced within a nation over a period of time (usually a year)
• GDP


  • Used to measure the economic performance of a country, an area such as the EU, or the whole world
  • Calculated in real terms, i.e. it is adjusted so that inflation is ignored
• Economic Growth


  • Increase in a nation's production of goods and services
  • Measured as the rate of increase in GDP
  • Means the same thing as "an increase in economic activity" - growth means there's more demand in the economy and more output to meet that demand
• Determinants of Economic Growth

  • Resources (quantity and quality of labour, investment in productive assets)
  • Productivity (how hard the nation is willing or able to work)
• The growth potential of an economy depends on the amount and quality of economic resources available
• Quantity of labour


  • Population size
  • Age
• A problem facing the UK is its ageing population. The proportion of people above retirement age is increasing and many need government support. This means that fewer resources are available to support economic growth.
• The quality of labour is the level of education and training that workers have reached. High quality labour enables an economy to grow faster.
• India has the largest youth population in the world. It is believed that its economy could rise dramatically if they invest in the education and health of their young people.
• Investment


  • Increases the amount of productive assets (machinery etc. used for production)
  • For the value of productive assets to grow, the level of investment in productive assets has to be greater than the amount of depreciation (the amount by which machines wear out) during the year
• Economic growth also depends on productivity-how hard the nation is willing or able to work.
• Governments can encourage short-term growth

  1. Cutting taxes

  2. Cutting interest rates
• Cutting taxes and interest rates

  • Encourages businesses to borrow money and invest it in production
  • Encourages consumers to borrow money and spend it on goods, which increases demand in the economy
• Effects of Economic Growth for Businesses

  • Higher revenues and higher profitability
  • Potential for economies of scale
  • Increased confidence and ability to plan for the future
  • Affects strategic decisions (expansion, new products, new markets)
  • Potential shortages of raw materials and skilled labour
  • Risk of recession following too-fast growth
• Rapid Growth


  Followed by Recession
• Income elasticity of demand

  Extent to which demand depends on customer income
• Very high rates of growth

  Usually followed by recession
• Governments try to keep growth at a sustainable level using fiscal policy and monetary policy
• In a boom


  1. GDP is high

  2. Production reaches maximum capacity

  3. Shortages

  4. Price increases

  5. Shortages of skilled labour mean wages rise
• In a recession


  1. Incomes start to go down

  2. Demand goes down

  3. Business confidence is reduced
• In a slump


  1. GDP is at a low

  2. Businesses close factories

  3. There are a lot of redundancies

  4. Unemployment is high

  5. A lot of businesses become insolvent or go bankrupt
• In a recovery or upswing period

  1. Production increases

  2. Employment increases

  3. People have more money to spend
• Income elastic goods


  • Luxury holidays
• Income inelastic goods


  • Staple foods
• Businesses deal with Changes in Economic Activity Locally and Globally
• During booms


  1. Businesses can raise prices

  2. This increases profitability

  3. It slows down demand a bit
• In a long-lasting boom

  1. Businesses invest in production facilities to increase capacity

  2. They may come out with new products to take advantage of increased consumer income
• During recessions


  Businesses may make workers redundant to save wage costs and increase capacity utilisation
• During a local recession


  1. Businesses can market their goods elsewhere in the country

  2. A local shop could market online
• In a national recession


  Businesses can market their products overseas
• When a national recession or slump lasts a long time


  Some businesses choose to relocate abroad
• Global upswings provide growth opportunities for everyone, and global recessions are bad for everyone
• Inflation


  Increase in the Price of Goods and Services
• Consumer Price Index


  Measures UK inflation - tracks the prices of hundreds of goods and services that an average household would buy
• Types of inflation


  • Demand-pull inflation
  • Cost-push inflation
• Demand-pull inflation


  • High inflation caused by too much demand (more than the economy can supply)
  • Increase in disposable income so people buy more and companies can't supply goods quickly enough and increase their prices
  • Excess demand when the economy is near its full capacity is called overheating
  • Can actually make profit margins go up
• Cost-push inflation


  • Rises in inflation due to rising costs pushing up prices
  • Wage rises can make prices go up - especially if productivity isn't rising
  • Can make profit margins go down if businesses decide not to put up their prices
• When inflation is high


  • Spending goes up temporarily as people rush to buy more before prices go up even more
  • If wages don't go up in line with inflation, spending goes down as people can afford less
• Expectations of inflation


  • Can make inflation worse
  • A business which expects its suppliers to put their prices up will put its own prices up to cover increased costs
  • Employees' expectations of rising prices makes them demand higher wages, so prices go up
  • This is the wage-price spiral - a big cause of cost-push inflation
• When inflation in the UK is high

  UK exports become expensive abroad, making UK businesses less competitive globally