<4.6 ECONOMIC GROWTH> 

• ECONOMIC GROWTH refers to an INCREASE IN THE PRODUCTION OF ECONOMIC GOODS AND SERVICES compared from one period of time to another and is TRADITIONALLY measured in terms of GROSS NATIONAL PRODUCT (GNP) or GROSS DOMESTIC PRODUCT (GDP).

• GDP is the total value of all final goods and services produced within a country ('Domestically') over a time period (usually a year), REGARDLESS OF WHO OWNS the factors of production. 

• It is mainly measured by calculating the LEVEL OF SPENDING / EXPENDITURE bY:

  • • • CONSUMERS (C)

      • FIRMS (I)

      • GOVERNMENT (G), and...

      • ...FOREIGNERS on EXPORTS (X)

Q. If OFS reported an increase in revenue, does this mean we have more students? Are we providing a greater level of output?

• REAL GDP PER CAPITA, refers to the value of all final goods and services, at CONSTANT PRICES. divided by the POPULATION. 

• A RECESSION refers to a temporary period of time when there is a significant decline in economic activity that lasts for 6 months or more.  

• Or is it?????

• With lower output, UNEMPLOYMENT is likely to RISE.

• With less disposable income CONSUMER SPENDING will inevitably FALL.

• The reduction in output and incomes will be expected to LOWER LIVING STANDARDS. 

• INVESTMENT SPENDING, both DOMESTIC and FDI, is likely to be DISCOURAGED as PROFITABILITY is now UNCERTAIN. 

• TAX REVENUE will DECLINE while GOVERNMENT SPENDING ON BENEFITS RISE which will NEGATIVELY IMPACT THE BUDGET (increase any budget deficit or reduce any budget surplus).

• The effect on the GENERAL PRICE LEVEL will depend on whether the recession has been caused by a DECREASE IN AD (Causing it to FALL) or a DECREASE IN AS (Causing it to RISE). 

• • • • HIGHER INCOMES => BETTER EDUCATION =>  GREATER EMPLOYABILITY => HIGHER INCOMES => MORE ECONOMIC ACTIVITY => MORE PRODUCTION =>  MORE ECONOMIC GROWTH...

      • HIGHER INCOMES => BETTER HEALTHCARE => INCREASED HEALTH EDUCATION => LESS PREVENTABLE DISEASES => BETTER FAMILY PLANNING => LESS SICK DAYS => GREATER PRODUCTIVITY LEVELS => MORE ECONOMIC GROWTH.

      • HIGHER INCOMES => MORE TAX REVENUE => MORE SPENDING ON HEALTHCARE-RELATED MERIT GOODS => HIGHER LIFE EXPECTANCY => GREATER OUTPUT => MORE ECONOMIC GROWTH.

      • HIGHER INCOMES => MORE TAX REVENUE => MORE SPENDING ON INFRASTRUCTURE-RELATED MERIT GOODS => GREATER OUTPUT => MORE ECONOMIC GROWTH.

      • HIGHER INCOMES => MORE TAX REVENUE => MORE WELFARE SPENDING => MORE EQUAL DISTRIBUTION OF INCOME => GREATER ABILITY TO RASE LOW-INCOME GROUPS OUT OF POVERTY => LARGER LABOUR FORCE => GREATER OUTPUT => MORE ECONOMIC GROWTH.

      • HIGHER INCOMES => LARGER GDP => BIGGER TRADE PARTNER => LARGER POLITICAL INFLUENCE (See G8)

• HIGHER INCOMES can lead to...

  • POLLUTION/UNSUSTAINABILITY: Greater levels of output, will inevitably mean GREATER USE and DEPLETION of NON-RENEWABLE energy RESOURCES, such as coal and oil INCREASING the levels of POLLUTION created from their EXTRACTION and use.

  • Furthermore, as incomes rise, the GREATER DEMAND for CONSUMER GOODS can lead to UNSUSTAINABLE USE OF COMMON ACCESS RESOURCES such as the fish in the sea (Overfishing) and trees in the forests (Deforestation).

  • LESS LEISURE TIME: Greater levels of output, will likely come at the expense of leisure time, unless productivity has improved to allow workers to produce more output per man-hour. 

  • GREATER INEQUALITY: Whilst greater output and incomes, sound desirable unless the gains are shared fairly and result in a better standard of living for all citizens then it can't be viewed as desired. 

  • LOWER LIVING STANDARDS: As we know, long-term economic growth most often occurs due to gains in productivity, which implies that greater emphasis has been placed on creating capital goods rather than consumer goods, hence with fewer consumer goods living standards may well drop in the short-term, though this is likely to reverse in the longer term.

Q. Watch the video below about Robert F. Kennedy's speech about why GDP is a poor measure of happiness. Identify FOUR examples that he uses. 

EXPANSIONARY FISCAL POLICY, with LOWER TAXES to promote both consumer and business spending, and INCREASED GOV'T SPENDING, should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF MONETARY POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

EXPANSIONARY MONETARY POLICY, with LOWER INTEREST RATES, encourage households and firms to borrow more money which they will spend in the economy, which should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF SUPPLY-SIDE POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

The primary aim of supply-side policies is to increase the production possibilities of the economy, hence nearly all these policies help to promote economic growth, in that they all attempt to INCREASE both the QUANTITY and QUALITY of the existing FACTOR ENDOWMENTS of an economy. These policies should increase the output and productivity of the economy leading to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF FISCAL POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

EXPANSIONARY FISCAL POLICY, with LOWER TAXES to promote both consumer and business spending, and INCREASED GOV'T SPENDING, should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF MONETARY POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

EXPANSIONARY MONETARY POLICY, with LOWER INTEREST RATES, encourage households and firms to borrow more money which they will spend in the economy, which should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF SUPPLY-SIDE POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

The primary aim of supply-side policies is to increase the production possibilities of the economy, hence nearly all these policies help to promote economic growth, in that they all attempt to INCREASE both the QUANTITY and QUALITY of the existing FACTOR ENDOWMENTS of an economy. These policies should increase the output and productivity of the economy leading to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF FISCAL POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

EXPANSIONARY FISCAL POLICY, with LOWER TAXES to promote both consumer and business spending, and INCREASED GOV'T SPENDING, should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF MONETARY POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

EXPANSIONARY MONETARY POLICY, with LOWER INTEREST RATES, encourage households and firms to borrow more money which they will spend in the economy, which should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT TYPE OF SUPPLY-SIDE POLICY CAN BE USED TO PROMOTE ECONOMIC GROWTH?

The primary aim of supply-side policies is to increase the production possibilities of the economy, hence nearly all these policies help to promote economic growth, in that they all attempt to INCREASE both the QUANTITY and QUALITY of the existing FACTOR ENDOWMENTS of an economy. These policies should increase the output and productivity of the economy leading to increases in GDP and economic growth, shifting the PPC outwards.

Q. WHAT IS 'REAL GROSS DOMESTIC PRODUCT (GDP)?  Real gross domestic product (Real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as constant-price GDP, inflation-corrected GDP, or constant dollar GDP.

Q. HOW CAN IT BE USED TO MEASURE ECONOMIC GROWTH? The GDP growth rate compares the year-over-year (or quarterly) change in a country's economic output to measure how fast an economy is growing.

Q. WHAT IS 'GDP PER HEAD (CAPITA)? Per capita gross domestic product (GDP) is a metric that breaks down a country's economic output per person and is calculated by dividing the GDP of a country by its population. 

Q. WHAT IS THE DIFFERENCE BETWEEN REAL & NOMINAL GDP? 

NOMINAL GDP = $ Value of all domestically produced finished goods & services at CURRENT PRICES.

REAL GDP = $ Value of all domestically produced finished goods & services at CONSTANT PRICES.

EXAMPLE: If I was to tell you that in 2019, this school had 100 students, paying $20,000 each, and made revenue of $2,000,000, while in 2020 it made revenue of $4,000,000, what would you conclude? Do you think the school is producing more of its service or less? Economic growth is ONLY concerned about whether the economy is physically producing more goods or services (This is called 'Real GDP'), therefore we need to know whether the school has more students studying there or not. The above figures do not give enough information regarding this. Why? Well because we do not know the impact of PRICE CHANGES, for example, the school fees could have quadrupled to $80,000, meaning the school actually only has 50 students ($4,000,000/$80,000) in 2020, which is a FALL in the REAL output of the school. In conclusion, we can see that when output is presented in CURRENT PRICES without taking into account price changes the results can not be trusted to represent the REAL output.

Q. HOW IS IT CALCULATED? 

When it comes to calculating GDP, due to the fact that 'the value of the goods and services sold (The price in the shop), = the income received from selling them, = the spending that occurs to purchase the goods', there are in fact three approaches that can be used. For example, when you buy a can of coke for $2, this $2 is not only equal to your spending, but also the price of the coke, and also the income of the sellers of the coke.

OUTPUT APPROACH: This approach attempts to sum the final market price of all domestically produced goods and services. CAUTION! The value of all final goods sold in the marketplace includes the value of all the intermediate goods that went into them. Hence we must avoid ‘Double counting’ e.g. we don’t count the value of the egg and the value of the cake it was used in, only the value of the cake.

INCOME APPROACH: This approach attempts to sum the total value of all incomes generated from the sale of new goods and services. CAUTION! Not all income is a result of producing new goods and services and is simply a transfer of money, e.g ‘Transfer earnings’ such as unemployment benefits so these will not be included in GDP also income earned from the sale of 2nd hand goods should not be counted as the good is not contributing to new GDP.

EXPENDITURE APPROACH: This approach attempts to sum the total value of all spending on domestically produced final goods and services. CAUTION! Not all spending is on ‘domestically produced goods and services’ some is on foreign-made goods which are categorized as ‘imports’ hence these must be deducted from GDP.

GDP = TOTAL SPENDING =

+C = Consumer spending

+I = Investments (Firm’s) spending

+G = Government spending

+X = Export spending

-M = Import spending

Q. WHY DO GDP STATISTICS OFTEN ‘UNDERSTATE’ THE TRUE LEVEL OF OUTPUT IN AN ECONOMY?

This economic activity is not included in GDP figures

•Illegal activities e.g. drugs

•Unrecorded work e.g. cash-jobs

•Voluntary work

•Home production…