7. Economic Growth

• Potential Growth


  The rate of increase in the capacity of the economy to satisfy the needs and wants of people in an economy
• Potential Growth


  • Potential for economy to produce more (satisfy material wants)
  • Those that increase the capacity of the economy to produce more goods and services with available resources
• Factors that increase the capacity of the economy to produce more

  • Increase in the quantity of resources
  • Increase in the quality of resources
• Increasing the capacity of the economy to produce more

  1. Increase in the quantity and/or quality of resources

  2. Illustrated by an outward shift of the Production Possibilities Frontier (PPF)

  3. Increase in Aggregate Production Function (APF)
• Actual Growth


  The rate of change in real gross domestic product over a given period of time
• Actual Growth


  • Changes in output in an economy: Using previously unemployed resources/more efficiently ==> increase production
  • How much expenditure is taking place to consume those goods and services
• Factors that increase actual growth

  • Using previously unemployed resources
  • Using resources more efficiently
• Increase in expenditure to consume goods and services

  Illustrated by going from a point inside to on the Production Possibilities Frontier (PPF) curve
• Factors of APF shifts

  1. Workers undergoing training to develop skills

  2. Firms can think of innovative ways of increasing efficiency

  3. Improve capital equipment

  4. People can become more educated

  5. Healthcare, healthier, better worker
• Limitations of GDP as a measure of economic growth

  • Unequal income distribution
  • True value of public goods and merits goods is largely unknown
  • Hidden market
  • Understates change in utility
  • Does not describe non-material welfare
  • Does not account for rising productivity
• All measures have flaws
• Alternative Measures of Economic Growth

  Take into account social, economic and environmental factors
• Determinants of Potential Growth

  • Population growth
  • Labour force participation
  • Rising labour productivity
• Population growth


  • Increase the total size of the economy: greater demand for G+S and productive factors
  • Increase quantity of resources (labour): migration and natural increase
  • Migration more than natural: migration promotes transfer of wealth, knowledge and skills and pos fiscal impact
• Labour force participation


  • Proportion of people over 15 years old who are in paid work or actively looking for work
  • Higher involvement at work: increase capacity of production (overcome effects of aging workforce)
  • Sustain gov tax revenue
  • Increase factor of production of labour
  • Overcomes those who are not working or people with lower productive
• Rising labour productivity


  • Capital deepening
  • Capital widening
  • Multi-factor productivity
  • Finding more natural resources
• Capital deepening


  • Increase in the stock of capital relative to the stock of other productive resources
  • Production becomes more capital intensive: increasing labour productivity
  • Technology changes and improvements of function which help to increase the amount of output
• Capital widening


  • Increasing in all factors of production at same time, increasing productivity
• Multi-factor productivity


  • All other factors that improve worker's ability to produce goods and services (not capital)
  • Changes in human capital: knowledge and skill that workers develop through education and experiences: improved by education
• Determinates of Actual Growth

  • Consumption
  • Investment
  • Government expenditure
  • Net exports (exports - imports)
• Economic growth rate


  Rate of change in GDP
• GDP


  The total market value of all final goods and services produced in a country during a certain time period
• Calculating economic growth


  Economic growth = (gdp(yr2)−gdp(yr1))/(gdp(yr1)) × 100 (%)
• Nominal GDP


  The value of output expressed in the prices of the day
• Real GDP


  Value of GDP after taking into account the value of inflation
• Calculating real GDP growth rate

  Real GDP growth rate(%) = Nominal GDP growth rate (%) - Inflation rate (%)
• Real GDP per capita


  Average real GDP per person in the population
• Aggregate Production Function (APF)


  Shows the relationship between the labour force and real GDP
• APF


  • Holding other factors constant: quantity of capital, state of technology
  • Shows a positive relationship between the quantity of labour and total production
  • Slope is curved downwards: rising at a decreasing rate (law of diminishing returns)
  • Never flat
• If the quantity of labour increased

  Real GDP will decrease (movement along the APF)
• Increasing the amount of capital equipment or improving the quality of the capital equipment that workers use

  • Amount each worker can produce has increased
  • Shifts the APF upwards/downwards showing potential growth
• Productivity of labour


  Increases because workers have more capital equipment available to use in production
• Benefits of economic growth

  • Increased material standard of living
  • Increased level of real income
  • Reduce unemployment
  • Improved efficiency
  • Fiscal dividend
• Increased material standard of living

  Increase quantity of goods and services<|>Satisfy more wants and needs
• Increased level of real income

  How much money an individual or entity makes after accounting for inflation<|>Satisfy more needs and wants with increased level of income
• Reduce unemployment


  Growth is clearly likely to stimulate demand for labour, and it is likely that more people will be employed and fewer unemployed
• Improved efficiency


  Promote knowledge, skills, productivity and tech changes which leads to higher quality of goods and services
• Fiscal dividend


  Rising income will lead to higher taxation revenue which can be used for public and merit goods such as infrastructure, health etc<|>Public and merit goods generate considerable external benefits. More hospitals and schools mean a healthier and better-educated population, which generates other economic benefits in terms of the effectiveness of the labour force
• Costs of economic growth

  • Structural unemployment
  • Inflationary pressure
  • Environmental degradation
  • Social dislocation
  • Income inequality
• Structural unemployment


  Mis-match of skills and knowledge available with the needs of the economy. Caused by Economy is changing the way it does thing, innovation, reduce cost