Economic Growth

Economic Growth

Increase in the real GDP of a country over a period of time.

GDP is the market value of all final goods and services produced in a country in one year.

Market value = Price*Quantity Produced

Final Goods: Those goods and services that can be readily used or consumed.

Intermediate Goods: All those goods that help in the production of other goods.

Methods of Calculating GDP:

1.  Output method/Value added method

Output method: output in primary sector + output in secondary sector + output in tertiary sector

Value added method: Sales price - Cost of raw materials

Sums up the value addition of every producing enterprise

2.   Expenditure method

Add all the spending made by the people in a country in one year

C(consumption expenditure) + I(Investment expenditure) + G(government expenditure) + Net Export(X(export) - M(Imports))

3.   Income method

Total income earned by all the people in a country from different sources

Rent + Wages + Interest + Profit

Should not include transfer payment: unilateral payment made by the donors to the receiver without receiving any productive effort from them(eg. unemployment benefit)

Why is the calculation of GDP important?

Helps with comparison of countries with different countries

Helps investors determine whether they should invest

Why does PPC moving to the right show economic growth?

The economy is capable of increasing its resource base

Resources are being allocated more efficiently

The country is now producing more units of one particular product

LRAS is long run aggregate supply curve which can be used to show economic growth

How can a country achieve economic growth?

• Discovery of new mineral resources: it leads to an increase in the resource base of the country. When that occurs, the country can produce more output. Due to this, its GDP rises. Through this, economic growth can be attained.

• Advancement in technology: it increases the productive capacity immediately. It also increases the efficiency of production processes. When there is advanced technology, the unit cost of producing output falls. This motivates producers to produce more. Due to this, its GDP rises. Through this, economic growth can be attained.

• Better training and education for labour: helps increase quality and quantity of labour in the country in the long run. 

• Adjustment to the resources: allocate resources to different sectors(primary, secondary, tertiary). There will be a major shift in the sectoral engagement in the economy.

Negative economic growth

Recession: an economic situation where the GDP of a country decreases continuously for two consecutive quarters (6 months). 

Depression: an economic situation where the GDP of a country decreases continuously. The consumers are not inclined to buy. The decrease in aggregate demand demotivates the producers and they are unwilling to produce anything. Characteristically, there is a high degree of unemployment. 

Business Cycle

An economic situation where there is a fluctuation in the economic activities of the country.

Stages of a Business Cycle:

1. Boom: high degree of inflation, high prices, GDP is high, employment is at an all time high, economic activity is at a higher level, high aggregate demand.

2. Recession: an economic situation where the GDP of a country decreases continuously for two consecutive quarters.

3. Depression/Slump: low degree of inflation, low prices, GDP is low, employment is at an all time low, economic activity is at a lower level, low aggregate demand.

4. Recovery: the economy starts recovering after the depression to come back to a situation of boom.

Positive effects of economic growth:

• Whenever economic growth occurs, the average income of the people increases. When they have a higher average income, the standard of living increases.

• Additionally, with economic growth, infrastructure gets better, increasing quality of living.

• Quantity and quality of production increases after improvements in technology and research and development.

• Lower level of unemployment

• Increase in public expenditure

Negative effects of economic growth:

• Increase in inequality

• Market failure due to increase in production

• Demand-pull inflation (Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply)

• Depletion of natural resources (get used up quicker in order to produce greater output)

A country can also attain economic growth by implementing demand and supply side policies.