Economics Self Notes on chapter 29 Made By Riyan Mehta

Economic Growth
 Gross domestic product (GDP): the total output of a country.
 Circular flow of income: the movement of expenditure, income and output around the economy.
 Value added: the difference between the sales revenue received and the cost of raw materials
used.
 Transfer payments: transfers of income from one group to another not in return for providing a
good or service.
 Nominal GDP: GDP at current market prices and so not adjusted for inflation.
 Real GDP: GDP at constant prices and so adjusted for inflation.
 Subsistence agriculture: the output of agricultural goods for farmers’ personal use.
 Recession: a reduction in real GDP over a period of six months or more.
 International Monetary Fund (IMF): an international organisation which promotes international
cooperation and helps countries with balance of payments problems
 Sustainable economic growth: economic growth that does not endanger the country’s ability to
grow in the future.
Economic Growth
 An increase in a country’s output of goods & services over time, measured by GDP
growth.
 Types of Economic Growth
Short-Run Growth (Actual Growth)
 Occurs when an economy uses its existing resources more efficiently.
 Caused by an increase in aggregate demand (AD) or better utilization of resources.
 Represented by a movement toward the production possibility Curve (PPC)
 Long-Run Growth (Potential Growth)
 Increases the productive capacity of the economy.
 Caused by improvements in technology, education, capital investment, and labor supply.
 Represented by an outward shift of the PPC.
Measurement of Economic Growth
 GDP is the total value of goods and services produced within a country over a given period. It is
the most commonly used measure of economic growth.
Types of GDP:
 Nominal GDP: Measured at current market prices (includes inflation).
 Easier to calculate than Real GDP.
 Useful for short-term analysis of an economy.
 Helps in assessing government revenue and debt.
Limitations of Nominal GDP:
 Overstates economic growth – If prices rise (inflation), GDP increases even if output stays the
same.
 Not useful for comparisons – Hard to compare across years or between countries.
Real GDP: Adjusted for inflation, providing a more accurate measure of growth.
 Real GDP per head (or GDP per capita) is the total Real GDP divided by the population of a
country. It measures the average income per person, adjusting for inflation.
 It provides a better measure of living standards than total GDP.
 A rising Real GDP per head indicates economic growth and improved welfare.
 Helps compare economic performance between countries.
Limitations of Real GDP per Head:
 Does not show income distribution – A high GDP per capita may hide inequality.
 Does not measure quality of life – Well-being depends on factors beyond income (e.g.,
healthcare, education).
 Excludes informal economy – Many developing nations have large informal sectors.
GDP per Capita: GDP divided by the population, indicating average income per person.
 Formula for GDP: GDP=C+I+G+(X−M)
 C= Consumer Spending/ I = Investment /G- Government Spending / X- Exports / M – imports
 Other Measures of Economic Growth
 Gross National Product (GNP)
 GDP + net income from abroad (income earned by nationals working abroad – income paid to
foreign investors).
 More accurate for economies with large international earnings.
 Challenges in Measuring Real GDP:
 Inflation varies across sectors, making it difficult to apply a single deflator.
 New products and technology improve quality but may not be accurately reflected in price
changes.

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Benefits of Economic Growth
 Higher Living Standards
 Increased GDP per capita means more goods and services are available.
 Higher income levels allow people to afford better healthcare, education, and housing.
 Increased Employment Opportunities
 Economic growth boosts demand for labor, reducing unemployment.
 More jobs improve household income and consumer spending.
 Higher Government Revenue
 Higher GDP leads to more tax revenue for the government (income tax, corporate tax, VAT).
 This allows for greater investment in public services like education, healthcare, and
infrastructure.
 Encourages Investment & Innovation
 Growth leads to higher business confidence, encouraging investment in new technologies.
 Leads to greater efficiency and productivity improvements.
 Reduction in Poverty
 Higher GDP raises incomes, improving conditions for lower-income groups.
 Governments have more resources to support social programs and welfare.
Costs & Problems of Economic Growth
 Inflation Risks
 If growth is too fast, demand outpaces supply, leading to higher prices (demand-pull inflation).
 Inflation reduces purchasing power, especially for those on fixed incomes.
 Income Inequality
 The benefits of growth may not be evenly distributed.
 The rich may gain more than the poor, worsening wealth inequality.
 Environmental Damage
 Increased production can cause pollution, deforestation, and resource depletion.
 Growth-focused industries may ignore environmental regulations.
 Structural Unemployment
 Rapid growth can lead to technological changes, making some jobs obsolete.
 Workers in declining industries (e.g., coal mining, manufacturing) may struggle to find new jobs.
 Over-reliance on Certain Sectors
 Some economies depend heavily on one industry (e.g., oil or tourism).
 A downturn in that sector can severely impact the economy.
Policies to Promote Economic Growth
 Monetary Policy (Interest Rates & Money Supply) 🏦
 Lower interest rates → Encourages borrowing and investment.
 Increased money supply → More spending and demand.
 Expansionary Monetary Policy
 Lower interest rates → Cheaper loans → Encourages borrowing and investment.
 Increase money supply → More liquidity in the economy → Stimulates spending.
 Quantitative easing (QE) → Central bank buys government bonds to inject money into the
economy.

PROS Cons
Encourages business expansion and Too much money supply can cause inflation.
consumer spending.
Reduces unemployment by stimulating job If interest rates are already low, monetary
creation. policy has little effect (liquidity trap).
 Contractionary Monetary Policy (Higher Interest Rates & Less Money Supply)
 Increase interest rates → Higher borrowing costs → Less spending and investment.
 Reduce money supply → Limits excess liquidity in the economy.
 Sell government bonds → Central bank absorbs excess money.

PROS CONS
Controls inflation and stabilizes prices. Reduces economic growth if overused.
Encourages savings over excessive Can lead to higher unemployment.
 borrowing.
 Fiscal Policy (Government Spending & Taxation)
 Tax cuts → Encourages spending and investment.
 Higher government spending on infrastructure and education → Improves long-term growth.
 Expansionary Fiscal Policy (Government Spending & Tax Cuts)
 Increase government spending on infrastructure, healthcare, and education → Boosts aggregate
demand (AD).
 Cut taxes → More disposable income → Higher consumer spending and investment.
 Government borrowing (deficit spending) → Funds economic projects.

PROS CONS
Encourages investment and job creation. Can increase budget deficits and national
debt.
Helps during recessions and slowdowns Risk of demand-pull inflation if demand
grows too fast.
 Contractionary Fiscal Policy (Reducing Demand & Government Spending)
 Increase taxes → Reduces disposable income → Lowers consumer spending.
 Reduce government spending → Less demand for goods and services.
 Repay government debt → Improves long-term economic stability.

PROS CONS
Helps control inflation. Political resistance to tax increases and
spending cuts.
Prevents excessive budget deficits. Can increase unemployment by slowing
business activity.

 Supply-Side Policies (Productivity & Efficiency)

 Investment in education & skills → Increases worker productivity.
 Deregulation & privatization → Encourages competition and innovation.
 Infrastructure development → Improves transport, energy, and communication.
 Expansionary Supply-Side Policies (Long-Term Growth)
 Investment in education & training → Improves worker productivity.
 Infrastructure development → Enhances transportation & communication.
 Tax incentives for businesses → Encourages investment in technology and innovation.
 Deregulation & privatization → Encourages competition and efficiency.

PROS CONS
Boosts long-term economic growth. High cost → Requires significant
government spending.
Reduces structural unemployment. Slow impact → Benefits are seen over years.

 Trade Policies (Encouraging Exports & Trade Agreements)

 Lowering trade barriers boosts exports and foreign investment.
 Free trade agreements increase market access for domestic firms.
Recession: Causes & Consequences
 A recession is a period of negative economic growth for two consecutive quarters or more. It
leads to falling GDP, lower incomes, and rising unemployment.
Causes of Recession
 Demand-Side Causes (Fall in Aggregate Demand)
 High interest rates → Reduce borrowing and investment.
 Higher taxes → Lower disposable income and spending
 Declining consumer & business confidence → People spend less, firms invest less.
 Weak exports → Global downturn reduces foreign demand.
 Supply-Side Causes (Fall in Aggregate Supply)
 Rising production costs (e.g., higher oil prices) reduce profitability.
 Natural disasters or pandemics disrupt economic activity.
 Labor shortages can slow business growth.
Consequences of a Recession
 Unemployment & Job Losses
 Businesses lay off workers → Higher unemployment.
 Lower income → Less consumer spending → Worsening economic downturn.
 Lower Government Revenue
 Less economic activity → Lower tax collections.
 Governments may struggle to fund public services.
 Business Closures & Lower Investment
 Falling demand → Businesses cut production or close down.
 Banks lend less, making it harder for new businesses to grow.
 Falling Consumer & Business Confidence
 People delay major purchases (e.g., houses, cars).
 Businesses halt expansion and cut costs.
 Deflation & Debt Problems
 Falling prices can lead to deflation, making debts harder to repay.
 Consumers and firms struggle with loan repayments, increasing bankruptcies.

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