Economic Growth

Economic Growth
Economic growth is the

increase in the level of national
output-that is, the annual
percentage change in GDP.
Give your opinion for these following questions:
- What are the factors that lead to economic growth?
- What are the consequences of economic growth?
- Is more competition good for economic growth?
GDP (Gross Domestic Product) is the total value of goods and services
produced in a country for a given period of time, usually one year.
- Consumption (C): total spending on goods and services by individuals and household in an economy, ex:
housing, transport, food, clothing and travelling.
- Investment (I): capital expenditure of firms which is used to further production and expand the
economy’s productive capacity, ex: spending on new machinery and the construction of new factories.
- Government expenditure (G): total consumption and investment expenditure of the government, ex:
spending on infrastructure such as road and the construction of new schools and hospitals.
- Export (X): the value of all exports sold to foreign buyers.
- Import (M): the value of payments made for all imports.
Economic Growth
Economic growth caused by:

- an increase in the quantity
and quality of factors of
production (land, capital,
labour and enterprise).
- technology
- regulation and law
- etc
economic growth increases the long term productive capacity of the economy
Causes of economic growth
Factors that account for the differences in the economic growth rates of different countries
include variations in the following:
- Factor endowment – factor endowment is commonly understood as the quality and

quantity of factors of production that a country use and exploit for manufacturing.
Countries with a large endowment of resources tend to be more prosperous than those
with a small endowment. And with specialisation, these countries can produce on a large
scale (economies of scale)
Saudi Arabia-Oil China-Labour Australia-gold,coal, etc

Factors that account for the differences in the
economic growth rates of different countries
- The labour force – the size, skills and

mobility of the economy’s workforce has an
impact on the country’s economic growth. India’s
large labour force and Germany’s highly skilled
workers have contributed to the economic
growth of these countries. the more
occupationally (workers are able to change their
job) and geographically (workers are willing and
able to move to different locations) mobile
workers are in a country, the greater its
economic growth is likely to be.
Factors that account for the differences in the
economic growth rates of different countries
- Labour productivity – the amount of goods

and services that workers produce in a given
time period. this is determined by several
factors such as the qualifications, experience
and training, and motivation of the labour
force. Technological advances can also
increase labour productivity, improve its
international competitiveness and prospects
economic growth.
Factors that account for the differences in
the economic growth rates of different
countries include variations in the following:
- Investment expenditure,
investment is a component to boost
the country’s productive capacity in
the long run. Investment
expenditure on physical capital such
as the computers in production.
Investment expenditure on human
capital such as training and
education.
Advantages of economic
growth
- Improved standard of living - economic growth tends to lead to a higher
standard of living for the average person. Higher income levels in a country
enable 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 unemployment in

the economy. this helps to raise consumption and encourages further
investment in capital, helping to sustain economic growth.
- Tax revenues - economic growth is related with higher levels of spending in

the economy. The government can collect more fro sales tax (on
consumption), corporation tax (on the profits or firms) and import taxes.
Disadvantages of economic growth
- Environmental consequences – high rates of economic growth can create
negative externalities such as pollution, congestion, climate change and
land erosion.
- The risk of inflation – if the economy grows due to excessive demand in the
economy, there is the danger of demand-pull inflation. this can lead to
prices of g/s rising to unstable levels, with the negative consequences such
as a decline in the country’s international competitiveness.
- Inequalities in income and wealth – although a country 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.
Circular flow of income
During a boom (or economic growth), the level of economic activity rises,
Business Cycle Diagram caused by combination of an increase in GDP for two consecutive quarters
(6 months).
Business cycle (trade cycle) describes
the fluctuations in economic activity in At the peak of the trade cycle, economic activity is at the highest level.
a country over time. unemployment is low, while consumer and business confidence levels are
high.
There is a fall in GDP for two consecutive quarters during an economic

recession. During a recession, there is a decline in consumption,
investment and net export earnings.
At the bottom of a recession in the trade cycle, a slump/ trough is said to

exist. There will be high unemployment while consumption, investment
and net export earnings will be low. Many business will have collapsed
and consumers have little confidence in the economy. Hence, government
spending may be needed to help the economy to economy to recover
from the recession.
A recovery in the business cycle occurs when the level of GDP starts to
rise, thus recovering from the slump. The levels of consumption,
investment and net exports gradually rise, thus leading to employment
opportunities in the long run.
Measures and Indicators of Living Standards
The two main measures or indicators of living standards are GDP per head (or GDP per
capita) and the Human Development Index (HDI).
Why does GDP per capita is better than GDP?

GDP has weaknesses in measuring standard of living because
it doesn’t involve number of population in the calculation.
For example, China’s GDP is significantly larger than Canada.

However, China is much larger population than Canada.
Hence, GDP per capita is better measure of standard of living

because one problem using GDP is that the size of population
is ignored.
An increase in GDP should consider about inflation. an

increase in GDP is useless if inflation rate also increase. So, to
measure standard of living its better if we use real GDP per
capita.
An alternative measure standard of living that looks at factors beyond real GDP is called the HDI (Human Development
Index) which has three dimensions of human development:
- Health care, this indicator measures life expectancy at birth. The better the healthcare in a country, the greater social
and economic wellbeing tends to be.
- Education, this indicator measures the mean years of schooling and the expected years of schooling and the expected
years of schooling in the country.
- Income levels, the higher the national income (or GDP) of a country, the greater human development tends to be.
However, there are limitations in using the HDI to measure standards of living:
- Qualitative factors, such as gender inequalities and human rights.
- Income distribution, the HDI doesn’t take account of inequitable income distribution which is measuring living
standards for the average person.
- Environmental issues, the HDI ignores environmental and resource depletion resulting from economic growth.
- Cultural differences,

Economic Growth

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Economic Growth

Economic growth is the

Economic growth caused by:

- Factor endowment – factor endowment is commonly understood as the quality and

Saudi Arabia-Oil China-Labour Australia-gold,coal, etc

- The labour force – the size, skills and

- Labour productivity – the amount of goods

- Employment - economic growth leads to higher levels of unemployment in

- Tax revenues - economic growth is related with higher levels of spending in

- Inequalities in income and wealth – although a country might experience

There is a fall in GDP for two consecutive quarters during an economic

At the bottom of a recession in the trade cycle, a slump/ trough is said to

Why does GDP per capita is better than GDP?

For example, China’s GDP is significantly larger than Canada.

Hence, GDP per capita is better measure of standard of living

An increase in GDP should consider about inflation. an

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