Download Chapter 31 Key Concepts – Economic Growth

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Chapter 31 Key Concepts – Economic Growth
Objectives of the chapter
Measurements
of growth
Limitations of
growth
Business
cycle
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What is Economic Growth? (∆GDPr/t)
National income will rise over a period of time. National income
is…
 The total value of all incomes in the economy (wages,
profits, dividends, interest, incomes, etc)
o Y (on “Q” axis in AS-AD model)
 The value of total output/production in the economy (we use
value-added since it’s impossible to estimate who the final
end-user is! This is in fact AS! )
o AS in AS-AD model
 The value of total spending in the economy (this is the most
common method and is in fact AD: C + I + G + X – M)
o AD in AS-AD model
Thus: Y = O = E
National income is measured by GDP (gross domestic product),
which measures the total value of all goods and services produced
over a period of time.
Growth Rate
Growth rate is the amount by which GDP increases per year. Usually
it rises because over a period of time, growth works like compound
interest rates.
GDP Limitations
 Inflation – growth rates are distorted by an increase of
general price levels.
Growth = Inflation Rate (no growth)
Growth > Inflation Rate (growth)
Growth < Inflation Rate (negative)
*The use of real GDP will overcome this problem, which
involved adjusting GDP for inflation.
(GDPnom at tn/Pindex at tn) x 100
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
Population Changes – for e.g., if both GDP and population
rise, it does not mean that people are better off.
*The use of GDP per capita will overcome this problem.

Statistical Errors – the government will take in numerous
amounts of information and some can be entered
inaccurately or even excluded.

Values of Home Produced Goods – some G and S aren’t
traded therefore it is not recorded in the economic activity.
(Growing their own produce, setting up their own shops,
DIY)

Hidden Economy – unrecorded paid work. This also includes
the black market and informal economy.

GDP is an average! Thus a rise in GDP does not
automatically mean living standards have improved for
everyone. Other factors are leisure time, share of income,
results of population, quality of G and S.
The Economic Cycle
1. Boom (peak of the cycle)
 GDP is growing fast
 Expansion of existing firms, entering of new ones
 Demands will increase, therefore jobs will be created
 Wages and profits will both rise
 However… prices might rise too (potential to inflation)
2. Downturn
 Still growing but at a slower rate
 Demand for G and S will be flatter
 Unemployment starts to rise
 Wage increases slow down
 Many firms stop expanding and some will leave the
market
 Prices rise more slowly and profits may fall
3. Depression (bottom of economic cycle)
 Associated with hardship
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Demand falls for many G and S – especially non
essentials
Sharp rise in unemployment and bankruptcies
Fall in prices
Recession is a less severe version of depression
4. Recovery
 GDP starts to rise again, upswing of the economy
 Confidence is regained and there is an increase in
economic activity
 Demand and price rise, unemployment falls
Benefits of Economic Growth
 Increased incomes – people will have greater incomes on
average. They will be able to purchase more G and S, things
with better quality, improved housing.

More leisure time – less working time is needed when the
economic has grown.

Greater life expectancies – healthier diets, medication and
medical technology are more accessible therefore people can
live longer.

Better public services – economic growth enables the
government to collect more tax revenue, which will be spent
to services such as health care, education, transportation and
the environment. All these will improve standard of living.
Problems of Economic Growth
 Regional differences – some areas will benefit more than
others, and this will lead to discontent.

Environmental damage – the more the economy grows, more
G and S (such as transportation) will be purchased. Some of
them might damage the environment by contributing
greenhouse gases, which cause global warming.

Unsustainable growth – non-renewable resources such as oil,
gas, gold and iron core will be used up. As a result future
generations will not have fewer resources.

Inflation – this is a result of the economy growing too
rapidly. Inflation can be defined as a rise in general price rise
which lowers purchasing powers or value of money,
resulting a lower living standard.
Christie Hartono
11J