Download Essential Basics – Growth A.S 2.3 Economic growth is defined as an

Essential Basics – Growth A.S 2.3
Economic growth is defined as an increase in the amount of goods and services produced. There are three ways of
measuring an increase in economic growth.
1. Increase in Real Income /Gross Domestic Product. GDP is defined as the value of goods and services produced in an
economy in a year. Nominal GDP = value of goods and services produced in a year, measured in current-year dollars. However
due to prices changing over time due to inflation Real GDP is
seen as a better measure of economic Growth. Real GDP =
nominal GDP adjusted for changes in inflation. It shows if
actual production has increased. Real GDP =nominal GDP ÷
𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥 (𝐶𝑃𝐼) × 1000
GDP= C + I + G + (X-M)
2. Increase in Productive Capacity. Productive Capacity
shows the potential of the countries resources. Ie. If all our
resources (Land, Labour and Capital) are fully employed how
much could the economy produce. Main disadvantage with
using this measure is that it doesn’t tell us if more goods and
services are actually produced.
3. Increase in Net Social Welfare =
Economic welfare + non-economic welfare. Economic welfare is GDP, Non economic welfare could include factors such as
Population, Birth rate, Death rate, Life expectancy, infant mortality, access to health and education etc. One way of
measuring Net Social welfare is using the Human Development Index. HDI index = 1/3 (Life expectancy index) + 1/3
(Education index) + 1/3 (GDP index).
Growth AD/AS Model- Any increase in AD or AS will cause an increase in economic growth
Increase in AD
Increase in AS
The PPF and Investment. Human Capital = Skills knowledge and abilities of employees which come from training and
experience. Savings = Income not spent. Investment =
Purchasing Capital (Man-made) goods. Consumer goods are
used by households. The more consumer goods available the
higher the standard of living. Capital Goods – man made goods
used to produce other goods and services. Producing more
consumer goods leads to smaller possible gains in growth in
the future (A). Producing more capital goods now means
greater gains in growth in the future (B).
Positive Effects
Households, Higher consumption, higher incomes, more
variety of goods, higher standard of living. Increased
employment
Producers, increased sales, revenues and profits.
Exporters become more competitive as productivity
increases.
Government –Employment increases, spending on benefits
falls. Increased tax revenue through GST, income tax and
company tax.
The Environment- As new Technology is developed better
methods of resource use are found
Negative Effects
Households – Increased monotony of jobs, some jobs
replaced by machines. Increased stress
Producers- Costs increase as resources become scarcer.
Inflationary pressure. Inflation causes exports to become
more expensive.
Government – May need to spend money to control
environmental issues. Inflationary pressures
The Environment – Increased resource depletion,
pollution and unsustainable resource use.