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Chapter 29 - Economic Growth - CIE IGCSE/O Level

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Published in: Economics
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Revision summary of Chapter 29 - Economic Growth of the CIE IGCSE & O Level coursebook.

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  1. ECONONIC GROWTH CHAPTER 29 'Ill
  2. Learning Objectives Economic growth define economic growth analyse the causes of a recession discuss the consequences of a recession analyse the causes of economic growth discuss the consequences of economic growth discuss the effectiveness of the policies available to promote economic growth
  3. GROSS DONESTIC PRODUCT (GDP) - REASURERENT gross = total; domestic = home; product = output; GDP: total output produced in a country. OUTPUT • adds up all output produced across all industries • risk of double-counting; to overcome this, only value added is counted NOTES INCOME • all the incomes which have been earned in producing the country's output • transfer payments (e.g. govt benefits) aren't counted as they do not produce output EXPENDITURE • adds up all expenditure on a country's output • includes exports sold to foreigners does not include imports by locals it is basically AD = C +1 • all methods should add up to the same value. we're talking about total revenue, not number of units sold
  4. REAL VS NOMINAL GDP Nominal GDP: GDP at current market prices and so not adjusted for inflation. Actual GDP: GDP adjusted to inflation; nominal GDP x (price index in base year)/(price index in current year) REAL GDP PER HEAD/PER CAPITA • Real GDP per capita = Real GDP/Number of population The impact of the rise in real GDP on individuals will depend on the state of population • If real GDP increases by 7%, but the population increases by 10%, there will actually be fewer goods and services per head of the population and people's living standards may fall. Therefore, real GDP per capita is usually considered a superior measure to living standards then simply real GDP CHALLENGES OF MEASURING GDP • It cannot account for informal economic activity, and therefore understates the true level of output • Informal markets arise when individuals trade without incorporating a business, either because it is bureaucratic, expensive and mainly because it involves tax; also because activity may be illegal
  5. CAUSES OF A RECESSION A decrease in AD or AS AD may fall due to negative demand-side shocks, such as a fall in C (consumption) due to a fall in real wages, or a fall in I (Investment) because firms are uncertain of the country's economic future AS may fall due to negative supply-side shocks, such as a cut in training or people choosing not to pursue higher education Price level AD Real GDP Fig. 29.2: (a) A recession caused by a decrease in aggregate demand Price level AD Real GDP (b) A recession caused by a decrease in aggregate supply
  6. CONSEOUENCES OF A RECESSION As output declines, demand for factors of production, especially labour, declines, leading to unemployment Recession is an undesirable economic cycle which heavily discourages investment, causing AD to contract even further • If recession is caused by fall in AD, price level will fall; if caused by fall in AS, it will increase Price level Fig. 29.2: (a) A recession caused by a decrease in aggregate demand price level Real GDP (b) A recession caused by a decrease in aggregate supply
  7. CAUSES OF ECONOMC GROWTH • In the short run, economic growth happens when AD increases, so a rise in any of the AD components will result in an increase in AD • In the long run, economic growth can only happen via a shift in AD, which is caused by an increase in the qty or qty of the factors of production CONSEOUENCES OF ECONOMIC GROUTH Living standards increase More employment and more firms become established, meaning larger tax base for the govt; in turn, G will also increase Higher GDP means more power in international economic and political setting, as countries will be able to contribute + to the IMF, World Bank, etc However... • Increased output means increased pollution and deforestation Greater stress on workers as they work longer hours to produce more
  8. HOW TO PROMOTE EG? • In the short run, when lots of resources are still unemployed, EG can be promoted at no additional cost by simply employing these idle resources Expansionary fiscal policy such as cut in tax rate Expansionary monetary policy such as a cut in interest rates
  9. You should know... GDP is the total output produced in an economy. GDP can be measured by adding up all output produced, all incomes earned from producing that output or the total amount spent on the output. Nominal GDP is total output measured in the prices of the year in question. Real GDP is adjusted for inflation. Changes in real GDP show changes in output. • If real GDP per head increases, there will be more goods and services available for people. The existence of the informal economy makes it difficult to obtain an accurate figure for GDP. • In the short run, increases in aggregate demand can lead to an increase in output, but in the long run, aggregate supply must also increase for output to continue to rise.
  10. You should know... Economic growth can improve living standards, reduce poverty, raise government expenditure on healthcare and education and increase the influence of an economy. Economic growth may involve a short-run opportunity cost, can cause pollution and damage to the environment and may put stress on people. Countries aim for stable and sustainable economic growth. A recession involves a fall in real GDP over two quarters of a year or more. A recession is caused by a decrease in aggregate demand or a decrease in aggregate supply. A recession will be likely to cause unemployment and a decline in living standards.

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