SECTION 4: GOVERNMENT AND THE MACRO ECONOMY

CHAPTER 29:
ECONOMIC GROWTH
TEACHER ENG
 ECONOMIC GROWTH
• Economic growth is the annual increase in the level of national output, i.e.
the annual percentage change in gross domestic product.
• Gross domestic product measures the monetary value of goods and services
produced within a country for a given period of time, usually one year.
ECONOMIC GROWTH
Economic growth can be shown
diagrammatically by an outward shift
of the production possibility curve
(PPC) for an economy. In this case, a
combination of an increase in the
quantity and quality of factors of
production shifts the PPC outwards
from PPC1 to PPC2, creating more
producer and consumer goods in the
economy.
 MEASUREMENT OF ECONOMIC GROWTH
• Nominal gross domestic product (nominal GDP) measures the monetary value of
goods and services produced within a country during a given period of time, usually
one year.
• The components of nominal GDP are:
» Consumption expenditure (C) — this refers to the total spending on goods and
services by individuals and households in an economy. Examples are spending on
housing, transport, food, clothing and domestic holidays.
» Investment expenditure (I) — this refers to the capital spending of firms used to
increase production and to expand the economy’s productive capacity. Examples are
spending on new machinery and technologies, and on the construction of new
factories.
» Government spending (G) — this is the total consumption and investment
expenditure of the government. Examples are spending on infrastructure (such as rail
and road networks) and on the construction of new schools and hospitals. The
calculation of government spending ignores payments made to others without any
corresponding output, such as unemployment benefits.
 MEASUREMENT OF ECONOMIC GROWTH
» Export earnings (X) — this measures the monetary value of all exports sold
to foreign buyers. For example, France exports a huge amount of wine, dairy
products and fruit, so the earnings from these exports are included in the
measure of its GDP.
» Import expenditure (M) — this measures the monetary value of all
payments for imports. France imports a lot of cars, oil and smartphones. The
spending on these items means that money leaves the French economy, so
this must be deducted in the calculation of its GDP. The difference between
the values of a country’s exports and imports (X – M) is called net exports.
 MEASUREMENT OF ECONOMIC GROWTH
GDP = C + I + G + (X – M)
• From this, two measures can be used to gauge the level of economic growth:
» Real GDP refers to the value of national income (GDP) that is adjusted for
inflation. It reflects the true value of goods and services produced in a given
year because inflation artificially raises the value of a country’s output.
» GDP per head (or GDP per capita) measures the gross domestic product of a
country divided by its population size. This is a key measure of a country’s
economic growth and standards of living, as GDP per head indicates the mean
average national income per person. Ceteris paribus, the larger the population
size, the lower the GDP per head for a certain level of GDP
 INDIVIDUAL ACTIVITY 1
a In 2017, a country’s nominal GDP is $375bn. In 2018, it rises to $500bn.
Between the two years, the price index rises from 100 to 125. What was the
percentage increase in real GDP?
b The table shows shows a country’s real GDP and population over a period of
three years, 2016–18. Calculate the real GDP per head in each year.

Year Real GDP ($bn) Population (millions)

2016 100 20
2017 110 22
2018 90 15
 INDIVIDUAL ACTIVITY 2
Estimates of the size of Nigeria’s informal economy vary from 35% to 70% of the
country’s GDP. Among the people who work in the country’s informal economy
are some taxi drivers, some street traders and some private educators. The
informal economy can play a major role in employment creation, income, and
production generation and innovation. Governments, however, try to encourage
businesses to move into the formal sector as they believe that the businesses,
their workers and themselves will gain benefits from such a move.
a Identify two reasons why someone may want to work as a taxi driver in the
informal economy.
b Identify two benefits a business, a worker and the government may gain from
the business moving from the informal economy into the formal economy.
 BUSINESS CYCLE
• The business cycle (also known as the trade cycle) describes the fluctuations
in economic activity in a country over time. These fluctuations create a long-
term trend of growth in the economy
 RECESSION
• Recession occurs in the business cycle when there is a fall in GDP for two
consecutive quarters.
• There are several interrelated reasons why a recession may come about:
» a higher level of unemployment
» higher interest rates, which discourages investment but raises demand for
savings
» greater uncertainty in the economy
» lower rates of disposable income, causing a fall in consumer spending
» lower levels of government expenditure
» a decline in the demand for exports
» lower levels of consumer and business confi dence.
 CAUSES AND CONSEQUENCES OF ECONOMIC
GROWTH
» Factor endowments
This refers to the quantity and quality of a country’s factors of production.
For example, Saudi Arabia is well endowed in the supply of oil, France has
plenty of arable land for its agricultural output, and Australia has many
natural resources such as coal, gold and iron ore.
These countries can therefore specialise production on a large scale and
benefit from economies of scale and export their lower price products in
overseas markets.
By contrast, countries that lack natural resources, land and productive
labour will tend to struggle to achieve economic growth.
 CAUSES AND CONSEQUENCES OF ECONOMIC
GROWTH
» The labour force
The size, skills and mobility of the economy’s workforce has an impact on the
country’s economic growth.
For example, India’s large labour force and Germany’s highly skilled workers
have contributed to the economic growth of these countries.
The mobility of labour refers to the extent to which workers can change
between jobs (known as occupational mobility) and the extent to which they
are willing and able to move to different locations for employment (known as
geographical mobility).
Generally, the more occupationally and geographically mobile workers are in
a country, the greater its economic growth is likely to be.
 CAUSES AND CONSEQUENCES OF ECONOMIC
GROWTH
» Labour productivity
This refers to the amount of goods and services that workers produce in a given
time period.
It is often referred to as output per worker, expressed as a monetary value (GDP
divided by the country’s labour force).
Labour productivity (the productive use of labour) is a key determinant of
economic growth.
It depends on several interrelated factors such as the qualifications, experience,
training and motivation of the labour force.
Technological advances can also enhance labour productivity, such as the use of
internet technologies in e-commerce (online trading).
An increase in the labour productivity of a country helps to improve its
international competitiveness and hence its prospects for economic growth.
 CAUSES AND CONSEQUENCES OF ECONOMIC
GROWTH
» Investment expenditure
Investment is a component of overall demand in the economy, so any
increase in investment should help to boost the country’s GDP.
Investment helps to boost the country’s productive capacity in the long run.
Investment expenditure on physical capital, such as the use of computers in
production, can also help to improve labour productivity.
In order to remain competitive in the long run, countries must invest in
capital resources.
POSITIVE CONSEQUENCES OF ECONOMIC GROWTH
» Improved standards of living — economic growth tends to lead to higher
standards of living for the average person. Higher income levels in a country
enable people to spend more money to meet their needs and wants. This helps
to eliminate absolute poverty in the country.
» Employment — economic growth leads to higher levels of employment in the
economy. This helps to raise consumption and encourages further investment
in capital, helping to sustain economic growth.
» Tax revenues — economic growth is associated with higher levels of spending
in the economy. This generates more tax revenues for the government. For
example, the government can collect more from sales taxes (on consumption),
corporate tax (on the profits of firms) and import taxes. Hence, there are more
funds for the government to use to further sustain the growth of the economy.
NEGATIVE CONSEQUENCES OF ECONOMIC GROWTH

» Environmental consequences — high rates of economic growth can create

negative externalities such as pollution, congestion, climate change and land
Erosion. Such environmental impacts can damage people’s wellbeing and
quality of life in the long run.
» Risk of inflation — if the economy grows due to excessive demand, there is
the danger of demand-pull inflation. This can lead to prices of goods and
services rising to unstable levels, with negative consequences for the economy,
such as a decline in the country’s international competitiveness.
NEGATIVE CONSEQUENCES OF ECONOMIC GROWTH

» Inequalities in income and wealth — although the country as a whole might

experience economic growth, not everyone will benefit in the same way.
Economic growth often creates greater disparities in the distribution of
income and wealth — the rich get richer and the poor get relatively poorer,
creating a widening gap between the rich and poor.
» Resource depletion — economic growth often involves using up the world’s
scarce resources at rates that are not sustainable. For example, deforestation
and overfishing have led to problems in the ecosystem.
 POLICIES TO PROMOTE ECONOMIC GROWTH
• Fiscal policy involves the use of taxation and/or government spending to
control the level of economic activity in the economy.
• Monetary policy involves the central bank changing interest rates in order to
control the level of demand and hence economic activity.
• Supply-side policies are used to increase the economy’s productive capacity.
These policies seek to increase competition, productivity and innovation in
order to promote economic growth.
 INDIVIDUAL ACTIVITY 3
Thailand’s economic growth rate fell to 0.9% in 2014. In 2015 it rose to 2.4%,
but the government was concerned that, without its intervention, it would
decline again. As a result, in late 2015 the government and the Bank of
Thailand both took measures to promote economic growth. The Bank of
Thailand cut the rate of interest and encouraged the country’s commercial
banks to lend more to households, farmers and small firms. The government
increased its spending by $8.3bn. Some of its spending went on infrastructure
projects, including building light railways, in a bid to extend the benefits of its
stimulus programme.
a Identify a monetary policy measure mentioned in the information.
b Why might an increase in lending cause economic growth?
c Explain why spending on infrastructure projects may promote economic
growth in the long run.
 EXAM-STYLE QUESTIONS
1 What is meant by economic growth?
A An increase in exports
B An increase in population
C An increase in real GDP
D An increase in the price level

2 The diagram shows a country’s economic growth

over the period 2012 to 2016.
A Output was highest in 2012
B Output was highest in 2016
C Output fell from 2014 to 2016
D Output was unchanged between 2012 and 2013
 EXAM-STYLE QUESTIONS
3 If consumer expenditure is $30bn, government expenditure is $10bn,
investment is $20bn, exports are $16bn and imports are $20bn, what is GDP?
A $56bn
B $76bn
C $80bn
D $96bn

4 What is most likely to cause economic growth?

A An increase in capital depreciation
B An increase in education and training of workers
C An increase in taxation
D An increase in unemployment
 EXAM-STYLE QUESTIONS
5 Economic growth can be defined as
A an increase in a country’s exports earnings.
B an increase in a country’s potential earnings.
C an increase in the productive capacity of an economy.
D a reduction in the cost of living.

6 Whether a country has experienced economic growth is best indicated by an

increase in
A consumer price inflation.
B current account on the balance of payments.
C employment.
D real GDP per capita.
 EXAM-STYLE QUESTIONS
7 As a country experiences economic growth, what is likely to fall?
A average years of schooling
B employment opportunities
C infant mortality rates
D national income per capital

8 Which is most likely to be a concern about rapid economic growth in a

country?
A higher costs of production
B higher tax revenues
C increased demand for imports
D resource depletion
 EXAM-STYLE QUESTIONS
9 Which is not a policy used to promote economic growth?
A increase spending on education
B lower government spending
C lower income tax rates
D lower interest rates

10 Define real GDP. (2)

11 Explain two consequences of a recession. (4)
12 Analyse the relationship between economic growth and the budget balance.
(6)
13 Discuss whether or not an increase in government spending will lead to
economic growth. (8)
 CHAPTER REVIEW QUESTIONS
1 What is meant by real gross domestic product (GDP)?
2 What is economic growth and how is it calculated?
3 What are the causes of economic growth?
4 What are the consequences, both positive and negative, of economic growth?
5 What is meant by a recession?
6 What is the business cycle?
7 How do calculations of GDP per head help to measure economic growth?
8 What are the main policies used to promote economic growth