Economic growth

• Macro economics


  concerned with the whole economy
• What does GDP stand for?

  Gross Domestic Product
• GNI stands for 


  Gross National income
• How to tell which economy is better

  • Change in GDP over a period of time (economic growth)
  • business performance and tax revenue
  • Unemployment rate and employment rate
  • inflation
  • balance of payments
• GDP definition 


  The value of the total output of an economy

  Economic growth is the % change in GDP over a time

  period
• GDP per capita- what is it?

  GDP divided by population in country (individuals’ own GDP)
• GDP vs Economic Growth

  GDP - a number or a level

  Economic Growth- rate of change or a percentage
• If growth rate is negative…

  Level of GDP is falling so lower
• If growth rate is positive…

  Level of GDP is increasing by that amount so is higher
• NOMINAL ECONOMIC GROWTH

  % change in GDP over time (not adjusted for inflation)

  % change = (new -old)/ old x 100%
• Nominal

  Allowing inflation to increase GDP / rate of inflation
• Real

  Inflation doesn’t effect GDP/ % change in GDP over time adjusted for inflation
• Real economic growth equation

  Real economic growth = nominal growth – rate of inflation
• potential economic growth - an expansion in the productive capacity of the economy
• gross domestic product-

  (GDP) a measure of the economic activity carried out in the domestic economy over a period
• gross national income

  (GNI) GDP plus net income from abroad
• actual economic- growth the rate of growth of GDP in a period
• business cycle a phenomenon whereby

  GDP fluctuates around its underlying trend, following a regular pattern
• GNI per capita


  The average level of GNI per head of population
• GNI is better at monitoring standard of living in a country – quality of life
• Positives of the use of GNI

  – Relatively straightforward and thus widely understood

  – Well established indicator and one that is available for almost every country in the world so that it can be used to compare income levels across countries
• Drawbacks of GNI

  Average GNI per capita neglects the important issue of income distribution.

  There may be variation in the effectiveness of data collection agencies in different countries, and variation in the size of the informal sector.

  • Converting from a local currency into US dollars may distort the use of GNI as a measure of the purchasing power of local incomes.GNI may neglect some important aspects of the quality of life.Recent research has begun to explore alternative ways of measuring well-being.
• Government intervention which could have undesirable consequence:

  • indirect taxes
  • Agricultural stabilisation schemes
  • Housing policies
  • environmental policies
• Recession - if an economy has two consecutive quarters of negative economic growth

  then it is in a recession.

  A quarter is 3 months, starting January, April, July

  or October.
• Standard of living is a measure of the quality

  of life. The measure can

  include physical assets and consumption, and less easily measured variables such as

  happiness, lack of stress, length of hours worked,

  lack of pollution, capacity

  of houses.
• GDP per capita (per head) is total GDP divided by the population. Total population figures cannot be assumed to be constant when looking at GDP, so GDP per capita gives a better indicator of incomes.
• Why is economic growth important?

  enables increased living standards, improved tax revenues and helps to create new jobs.
• Aspects of economic growth

  • Causes of economic growth
  • Costs/benefits of economic growth
  • Policies to improve economic growth
  • Different types of economic growth
  • Recessions (negative economic growth)
• Causes of economic growth 


  :

  
• Economic growth is caused by rising demand and an increase in productive capacity.
• Diagram showing long-run economic growth

  In this diagram, we have an increase in aggregate demand (AD) and an increase in long-run aggregate supply (LRAS). This enables a rise in real GDP – without causing inflation.

  
•  Productivity is output per worker.
• Supply-side policies are government attempts to increase productivity and increase efficiency in the economy
•  Shift Long Run Aggregate Supply (LRAS) to the right:

  • Income tax cuts (to increase incentives to work);
  • Privatisation (Make government-owned firms private to increase the profit-incentive and efficiency.)
  • Reduce red-tape and bureaucracy which raises costs for firms.
  • Spending on education and training to improve labour productivity
  • More on Supply-Side Policies
• Monetary policy

   If successful, lower interest rates should increase aggregate demand, and in the long-term, increase long-run aggregate supply.

  
• Fiscal policy - The government's use of taxation and spending to influence the economy and boost aggregate demand
• Benefits of economic growth

  
• Outcomes of economic growth:

  1. Higher incomes for workers and firms.
  2. Increased tax revenue for the government which can be spent on public services, e.g. education, pensions and healthcare.
  3. Reduced government debt. Higher economic growth usually reduces the government’s budget deficit because of the improved tax revenues.
• Outcomes of economic growth

  1. Economic growth creates employment and helps to reduce unemployment.
  2. Economic growth creates a positive feedback loop. Higher growth encourages firms to invest. The increased investment enables higher growth in the future.
  3. Economic growth enables a reduction in absolute poverty. In the past 100 years, growth has helped to significantly reduce absolute poverty in Western Europe, the US and recently in Asia.
• Potential costs of economic growth

  1. Inflation. If growth is too fast, we could experience inflation.
  2. Current account deficit. If growth is unbalanced, we could see a growing current account deficit as people buy more imports.
  3. Environmental costs. Economic growth leads to higher resource consumption and pollution.
  4. A decline in living standards. Economic growth does not always increase living standards. Higher growth could cause new problems such as congestion, increased crime, increased dissatisfaction and more pollution.