Chapter 22: Economic

Growth and Development

Learning Objectives
• Define economic growth;
• Explain how economic growth is measured;
• Calculate the rate of economic growth from given
data;
• List the problems associated with GDP in
determining economic growth;
• Explain the business cycle with the aid of a diagram;
• Discuss the sources of economic growth
Economic Growth

• Economic growth is traditionally defined as the annual rate of

increase in total production or income in the economy.

• Economic growth is measured using the Gross Domestic Product.

How Economic Growth is
measured
• This definition has to be qualified in two important respects.

• First, the production or income should be measured in real terms, that is,
the effects of inflation should be eliminated.

• Second, the figures should also be adjusted for population growth. In other
words, they should be expressed on a per capita basis.

• Positive economic growth actually occurs only when total real production or
income is growing at a faster rate than the population.
Calculation of Economic Growth
Population 1000 000
2012 2013

Shoes 20 @ R250 each 25 @ R275 each

Bags 12 @ R 300 each

15 @ R350 each

2012 Is the base year

1. Calculate nominal GDP for 2012 and 2013
2. Calculate real GDP for 2013
3. Calculate % change in nominal GDP between 201 2 and 2013
4. Calculate % change in % change in real GDP between 2012
and 2013
5. Calculate real GDP per capita for 2013
Some Problems associated with
GDP
1. Non-market production- It is difficult to measure or estimate the
value of activities that are not sold in a market.
• for example, to the production of goods and services by the
government. Since most of these goods and services are not sold in a
market.
2. Unrecorded activity- A more serious problem is that many
transactions or activities in the economy are never recorded.
• Examples: Such transactions or activities are described by terms such
as the unrecorded economy, the underground economy, the shadow
economy and the informal sector, drugs trafficking,
3. Data revisions. Another problem associated with GDP and the other
national accounting aggregates is that the original estimates are
frequently adjusted as new and better data become available.

4. Economic welfare. Many economists argue that GDP and the other
national accounting totals are not good measures of economic welfare.

They point out, for example, that unwanted by-products (also called
negative externalities) such as pollution, congestion and noise are not
taken into account.
Business Cycle
• The business cycle is the pattern of upswing (expansion) and
downswing (contraction) that can be discerned in economic activity
over a number of years.

• One complete cycle has four elements: a trough, an upswing or

expansion (often called a boom), a peak, and a downswing or
contraction (often called a recession.
• The figure shows a complete business cycle from one trough (point A) to the
next trough (point C).

• The cycle describes a pattern of fluctuation around the long-term trend.

• After the trough there is an upswing, indicated by AB in the figure.

• The peak is reached at point B, followed by a downswing from B to C.

• Boom (upswing): Periods of rapid increase in aggregate demand and economic

growth.

• Recession (downswing): Two consecutive quarters of negative economic

growth.
 Causes of Business Cycle
• Classical approach: An approach to business cycles (dating from the 19th century) that
market economies are inherently stable. Classical economists regard fluctuations in the
growth of economic activity as temporary phenomena that can be ascribed to exogenous
factors (factors which originate outside the market system). In contrast to the Keynesian
approach.

• Keynesian approach: Keynesians believe that business cycles are part and parcel of the way
in which market economies operate. In other words, they believe that the business cycle is
an endogenous phenomenon. They believe that governments have a duty to intervene in
the economy by applying appropriate monetary and fiscal policies. In contrast to the
classical approach.

• Structuralist approach: An alternative approach to the diagnosis of inflation. This approach

retains the distinction between demand-pull and cost-push but places it in a much broader
context. The result of the interaction between three interrelated sets of factors: underlying
factors, initiating factors and propagating factors. See also demand-pull and cost-push
Example in Simple Terms: Classical
• Imagine a farmers' market where different farmers sell fruits and
vegetables. Each farmer sets their own prices based on how much produce
they have (supply) and how many customers want to buy it (demand).
• If one farmer has too many apples and not enough customers, they might
lower the price of apples to attract more buyers. Other farmers will notice
this and might lower their prices too, balancing supply and demand.
• According to the classical approach, no central authority needs to step in
and set the prices or decide how many apples or oranges should be grown.
The market, through the decisions of buyers and sellers, naturally adjusts
to changes and finds a balance.
Example in Simple Terms:
Keynessian
• Imagine a city during a recession where many people are losing their
jobs, and businesses are closing down because people are not
spending much money.
• Keynesian Approach Suggests: The government should step in and
build a new public park or infrastructure project. This project would
create jobs for construction workers, architects, engineers, and
suppliers.
• Jobs will be created, leading to increased demand as the new
employees get money to spend, the firms will employ more people to
meet this demand (the cycle continues)
Example in Simple Terms:
Structuralist
• Imagine you’re trying to understand why some plants in a garden grow
well and others don’t. An individualistic approach might focus on the
care given to each plant (watering, sunlight, etc.).
• A structuralist approach, however, would look at the entire garden's
structure: the quality of the soil, the layout, the irrigation system, and
the availability of nutrients. It would argue that the overall structure of
the garden largely determines the health of each plant.
• In summary, the structuralist approach is about understanding how
deep, systemic factors shape the outcomes we see, and it often
emphasizes the need to change these structures to achieve better
results.
Causes of Business Cycle
• It is caused by Exogenous factors( factors outside the market system)including:

1. Weather Conditions: The changes in weather conditions affect agricultural

production and therefore also the total level of economic activity.

2. Government policies: the fluctuations to faulty or inappropriate government

policy which results in fluctuations in the rate of increase in the money stock.

3. Natural disasters: unexpected events affect economy.

Endogenous Factors:

1. Improvement in business conditions.

2. Fiscal and monetary policies.

 Business Cycle Indicators
• Business cycle indicators-: Certain critical variables or indicators that
possibly reflect or predict movements in overall economic activity. See also
leading indicators and business cycle.

• Leading indicators-The most important indicators of business cycle activity,

which tend to peak before the peak in aggregate economic activity and
reach a trough before the trough in aggregate economic activity.
• They thus give advance warning of changes in aggregate economic activity
and help to forecast business cycle movements.
• Examples-initial jobless claims
• Coincident indicators- an economic statistical indicator that changes (more or less)

simultaneously with general economic conditions and therefore reflects the current status

of the economy, GDP.

• Lagging indicators-A lagging indicator is an economic factor that changes only after the

change in the economy has already taken place. Can be used to study recent performance

but can’t predict future predict future trends.

• Unemployment rate, profit.

Sources of Economic Growth
• The supply factors are those which cause an expansion in production
capacity, also called the potential output of the economy.
Supply Factors:
1. Natural Resources-A country is endowed with minerals, arable land,
a favourable climate, and so on – these natural resources are either
present or absent.
2. Labour -A second supply factor is the size and quality of the labour
force. The size of the labour force depends on factors such as the
size and the age and gender distribution of the population.
• The growth of the labour force depends on the natural increase in the
population and migration between countries
3. Capital
• The third supply factor is the quantity and quality of the country’s
capital (ie the manufactured means of production such as buildings,
machinery, equipment and roads).
• Economic growth requires more and better capital equipment.
• An increase in the capital stock may take the form of either capital
widening or capital deepening.
1. Capital widening occurs when the capital stock is increased to
accommodate an increasing labour force.
2. Capital deepening occurs when the amount of capital per worker is
increased, that is, when the growth in the stock of capital is greater
than the growth in the number of workers. Such a situation is
referred to as an increase in the capital intensity of production
4. Entrepreneurship

The fourth supply factor is entrepreneurship. A country needs people

who can identify opportunities and exploit them by combining the

other factors of production.

Demand Factors

1. Domestic demand, which consists of consumption (C), investment

(I) and government spending (G)

2. Export demand (X)

3. Import substitution, which involves attempts to reduce imports (Z)