Download Slide_6-3

S17
IGCSE®/O Level Economics
6.3 Output and growth
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Measuring economic activity
Resources are used to produce goods and services. But how can we measure how the
total output of goods and services grows or changes over time?
national output = national income = national expenditure
We can therefore measure total output in three ways because the value of output is also
equal to the total amount spent on purchasing it, which in turn is used to pay for the
resources used to produce it, i.e. factor incomes including wages and any profits
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Gross domestic product
The total value of output produced in an economy is its gross domestic product (GDP)
As prices rise the total value of output or nominal GDP will also rise, but there may
be no actual increase in the volume of goods and services produced
If the volume of goods and services expands, then the real GDP will have increased
Year 1
GDP = $100bn
Year 2
Year 1
GDP = $110bn
But inflation was 10%
so there has been no
change in real GDP
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
GDP = $100bn
Year 2
GDP = $110bn
Inflation was only
3% so there has
been a 7% increase
in real GDP
Economic growth
…is measured by the rate of increase in real GDP each period (i.e. the
change in nominal GDP adjusted for price inflation over the same period)
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Achieving long-term growth
Long-term growth in an economy is achieved
by expanding its productive potential:
•
the discovery of more natural resources
•
investment in new capital goods and
infrastructure
•
technical progress, including the discovery
of new man-made materials and more
efficient equipment, processes and products
•
increasing the amount and quality of labour
through more and better health care,
education and training
•
a more efficient allocation of resources
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Growth cycles
All countries experience cyclical fluctuations in their rate of economic growth over time
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
The economic cycle
▼ The economic cycle
Economic recovery: real GDP grows faster
than normal. Demand for goods and services
rises rapidly. Firms increase output and hire
more workers. Profits and other incomes rise
Economic boom: demand for goods
and services rises faster than output can
rise. Profits peak and prices rise as
economy ‘overheats’
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Economic recession: real GDP falls.
Demand for goods and services falls.
Firms cut their production and lay off
workers. Profits and other incomes fall
Short-lived, long-lived or double-dip
recession?
▲
A U-shaped economic recession
▲
A V-shaped economic recession
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
▲
A double-dip recession
Economic growth or economic welfare?
The benefits of economic growth are:
more goods and services, more wants satisfied
increased employment opportunities and incomes
increased sales, profits and business opportunities
low price inflation if output growth keeps pace with demand
increasing tax revenues for a government to improve public services
and public infrastructure
improved living standards
Possible problems with growth are:
▲ Progress at any price?
xtechnical progress may replace labour with machines
xscarce resources are used up at a faster rate
xincreasing pollution and damage to natural environment
xpeople are not necessarily better off if growth is achieved, for example
by producing more weapons, cigarettes, coal-fired power stations or
even more cars, televisions and computer games
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Measuring economic welfare
Simply measuring and monitoring the rate at which real output grows over time reveals
very little about how standards of living are changing, if growth is sustainable, and
whether economic welfare is improving.
Here are two possible measures of living standards:
Real GDP per capita
Human Development Index (HDI)
A measure of the average income per person. If
real GDP grows but the population increases at a
faster rate then average income per head will fall.
A wider measure that includes:
•
real GDP per capita (adjusted for
differences in exchange rates between
countries)
•
level of education (how many years on
average a person aged 25 will have
spent in education and how many
years a young child entering school
now can be expected to spend in
education during his or her life)
•
access to health care and having a
healthy lifestyle (measured by life
expectancy)
But it takes no account of:
•
how income is distributed (a few very rich
people can skew the average upwards)
•
what people can buy (the availability of goods
and services may be poor)
•
the quality of and access to education, health
care, clean water and sanitation
•
the impact of growth on the natural
environment
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
There are wide disparities in human and
economic development
Source: UNDP
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute