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Topic 3.1
Economic Growth
This topic covers economic growth, and how it is caused both in the short-run and the long-term. You will also learn about macroeconomic fundamentals, including GDP, GDP per capita, and how we analyse graphs. You will also evaluate whether economic growth is entirely positive.
The Five Economic Objectives
The UK government has 5 main economic objectives, the first being economic growth, which is the sustained growth in the GDP or value of output of a country over time.
Economic Growth
Low Unemployment
Fair Distribution of Income
Price Stability
Balance of Payments Equilibrium
Short and Long-Run Economic Growth
Short-Run Economic Growth
The actual annual percentage change in real national output
Long-Run Economic Growth
An increase in the potential productive capacity of the economy
Gross Domestic Product
GDP
Gross Domestic Product is the total value of all finished goods and services produced within a country in a specific time period.
GDP per capita
GDP per capita measures the economic output per person. It is calculated by dividing the total GDP by the total population of the country. GDP per capita is better to compare standard of living between countries because countries have different populations
Comparing Nominal vs Real GDP
Nominal GDP
Real GDP
- Measured at constant prices (compared to a base year)
- Adjusted for the effects of inflation
- Reflects changes in quantity of output only
- Real values are what we should be using as it allows for a fairer comparison of things such as the purchasing power of income, or whether income has actually risen on real terms)
- Measured at current market prices - is the actual value
- Does not account for inflation or deflation
- Reflects changes in both price and quantity
Formulas
Real and Nominal GDP
Real GDP = Nominal GDP/Average Price Level
If inflation is 5%, then the average price level is 1.05
E.G. at 5% inflation, nominal GDP of £10bn, RGDP = 10bn/1.05 = £9.52bn
Rate of Growth
Rate of Growth = (Change in GDP/Original GDP) x 100
Can be done intuitively using knowledge of percentages
Real and Nominal GDP (percentages)
Real % change + inflation (%) = nominal % change
Can be applied to wages, GDP and other values
Analysing Data
Key Description Elements
When analysing data, you should always look for and describe: Rates of change, Directions of change (positive/negative), Highest and lowest points, with stats, Technical terms e.g. boom/recession.
Exemplar Description
Between 2010 and 2015, the UK economy entered a recovery phase following a significant recession. Real GDP growth reached its peak in 2014 at a rate of 2.9%, representing a boom period compared to previous sluggish growth.
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A boom is a period of high economic activity and high levels of employment with lots of economic growth
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A recession is a period of time where the country's GDP falls for two or more consecutive quarters (i.e. 6 months or more)
Determinants of Short-Run Economic Growth
Economic growth in the short-run occurs if there is an increase in aggregate demand or short-run aggregate supply.
Economic growth can occur if there is an increase in short-run aggregate supply (SRAS), which is caused by any decrease in the cost of production, such as wages, price of raw material, taxes/subsidies, exchange rates.
Aggregate demand (AD) is the total demand for goods and services produced domestically, and is the same as GDP.
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Its formula is shown above - if consumption, investment, government spending or net exports increases, it will cause short-run economic growth.
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This is the most common cause of short-run economic growth
Determinants of Long-run Economic Growth
Long-run economic growth only occurs if there is an increase in the productive capacity of an economy - which is an increase in long-run aggregate supply (LRAS). Increases in LRAS can only occur if there is a change in the quality or quantity of the Factors of Production (land, labour, capital, enterprise)
Size and productivity of the workforce - An increase in the number of workers or the productivity of workers will lead to more output being produced
Improvements in Technology - Makes it quicker, easier and cheaper to produce products which leads to lower unit costs and an increase in supply - firms become more productive and output increases
Investment - Lower interest rates and expectations of future economic growth are typically causes of firms increasing investment and productive capacity, through investing in new machinery, hiring more workers, new factories - investing in the FoPs which causes an increase in LRAS.
Education and Training - This increases the human capital of workers, so each worker becomes more valuable to the firm. Highly trained workers can produce better quality, faster and at a lower cost. They also bring new ideas into the firm. This can be utilised to increase revenue streams.
Increased Availability of natural resources - Makes it less expensive for firms who use those resources which can increase total output.
SAWTHEM - An improvement of the labour force will mean that they can produce more output which translates to an increase in productive capacity (topic 2.7)
Evaluating the costs and benefits of economic growth
Points
Evaluations
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Rise in the standard of living - When the GDP rises individuals should experience an improvement in their material standard of living as real GDP per capita rises. This is because there is more output being produced over a set period of time and it is increasing at a faster rate than population. A growing economy also requires more labour to produce at the new level which creates more job opportunities and increased wages, which leads to people having more disposable income, which can in turn lead to more consumption to spur further growth for the economy. (MULTIPLIER EFFECT)
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Reduced poverty - As output and incomes rise, the government will receive greater tax revenue and dish out less money on benefits - from both greater incomes and increased consumption (income tax and VAT respectively). This tax revenue can be spent on raising living standards of those with lower incomes to ensure a basic minimum standard of living which will hence reduce poverty.
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Lower Unemployment - As the economy grows the demand for goods and services rises which will lead to firms demanding more labour to provide those products. This is good as it encourages more investment and production from firms, which contributes to aggregate demand. It will also mean that there are more people earning money and having a disposable income, which will increase consumption and hence AD. The government will also receive more tax revenue
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Potential decrease in quality of life - While economic growth can make individuals materially better off it can also change their lifestyles for the worse. For example, people may move from the countryside to cities where life is busier and more stressful. This could be due to moving to better-paid but boring and repetitive jobs. People may experience much less leisure, community, and rest in their lives. They may even become unhealthy as they exercise less, consume more fast food and drink, and eat fewer natural foods and more ‘junk’ foods. Obesity and disease can become much more common in rich modern economies like the UK, which have achieved development through economic growth.
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Income inequality - Economic growth can cause income inequality. This is because economic growth is spurred from cities, which means that people living in the countryside won’t be able to gain. This means that growth happens unevenly around the country, and the benefits of economic growth are unevenly spread. This means that poverty isn’t actually reduced, but the rich are getting richer.
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Environment - Economic growth often comes with significant environmental costs: it increases pollution through the production and consumption of goods and services, which harms air, land, and water quality. The resulting emissions contribute to global warming by raising greenhouse gas levels. Growth also leads to congestion, especially in urban areas, as the demand for transportation rises. Furthermore, economic activity relies heavily on scarce resources such as fossil fuels depleting these essential materials for future generations.