Section 4 GDP and Economic Growth

Macroeconomics
Gross Domestic Product and

Economics
Economic Growth
The Goal of Macroeconomists
• The goal of macroeconomists is to explain
what influences the pace of:
- Economic growth
- Economic fluctuation
- Unemployment
- Inflation
LO1
Gross Domestic Product (GDP)
Measure of the total market value of all final goods
and services produced within the borders of a
country during a specific period of time, typically a
year.
Note:
- Final goods and services are purchased by the
end-users.
- GDP exclude the value of intermediate goods:
refers to product that are purchased for further
processing or manufacturing.
- GDP exclude second hand sales (i.e. Used
car)
LO1
Three Approaches to GDP
Output approach
adding up the output produced by all the industries
in the country
Ensure that output is not counted twice
For example, the value of the output of the car
industry includes output of the steel and Tyre
Value added: the difference between the sales
revenue and the cost of raw materials used
LO2
Three Approaches to GDP
Income approach
Sum of total income that firms pay households for
factors of production they hire.
GDP = Total Income = Wages + rental income +
interest income + profit
Expenditure approach
Sum of all the spending on final goods and
services
GDP = Aggregate Expenditure =Consumption +
Investment + Government expenditure + (Export –
Import)
LO2
Nominal vs. Real GDP
Nominal GDP
Measures the market value of all final goods and services
using the current year price.
Change in nominal GDP can be due to change in price and
output
Real GDP
Measures the market value of final goods and services using
the base year price
Change in real GDP reflects change in output only
Real GDP = (Nominal GDP/Price Index)*100
LO3
Nominal vs. Real GDP
In 2007, the nominal GDP of a country may be $800
billion and its price index may be 100(base year)
In 2008, the nominal GDP may increase to $900billion
Giving the impression the output has risen by
$100bn/800bn*100=12.%
If, however, the price index rises to 110, the real GDP i
2008 will be $900bn*100/110=$ 818.18bn
the increase in output is $18.18bn/$800bn*100=2.27%
LO3
Real GDP per head
To find out, what is happening to people's living standards,

economists calculate real GDP per head which is also referred to
real GDP per capita
LO3
Economic Growth
• Economic growth is an increase in the capacity of an

economy to produce goods and services compared from one
period of time to another.
• An increase in the quantity or quality of factors of production
can create economic growth, such as an increase in the
labour supply or improvements in the state of technology
• Economic growth increases the long-term productive capacity
of the economy
LO1
Causes of Economic Growth
In the short run, an increase in AD may stimulate a rise in

output, while an economy can continue to experience economic
growth only if the quantity or quality of resources increase
 The labor force: the size, skills and mobility of the economy’s
workforce has an impact on the country’s economic growth
 Productivity: an improvement in education and training and
advances in technology
 Net investment: in order to remain competitive in the long run,
countries must invest in capital resources
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Advantages of Economic Growth
 Improved standards of living

• Higher income levels in a country enable people spend more money to
meet their needs and wants
• Ensure that people have access to basic necessities
 Increase government tax Revenue
 Economic growth is associated with higher levels of spending in the
economy
 Higher output and incomes increase government tax revenue, making it
easier for governments to finance measures to reduce poverty
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Advantages of Economic Growth
 Increase in employment
• Employment 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
• Increase global influences
• As an economy grows, its political and economic standing and
influence usually increases, Voting power at International
Monetary Fund(IMF),
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Disadvantages of economic
growth
 Environment consequences
• High rates of economic growth can create negative externalities such as
pollution, congestion, climate change and land erosion
• Lead to depletion of non-renewable resources and damage the natural
environment.
• Construction of more factories, offices, roads and other infrastructure can
also destroy wildlife habitats
growth
• The risk of inflation
• If the economy grows due to excessive demand in the
economy, there is a danger of demand-pull inflation. This can
lead to negative consequences on the economy such as
decline in the country’s international competitiveness
growth
• Uneven distribution of income and wealth
• Although a country might experience economic growth, not
everyone will benefit in the same way.
• Economic growth often creates greater difference in the
distribution of income and wealth, the rich get richer and the
poor get relatively poorer, creating a widening gap between
rich and poor
Recession
 A recession occurs when real GDP declines over a period

of six month or more.
 It may be caused by a decrease in aggregate demand or
in aggregate supply.
 Increase in unemployment, decrease in investment
 Lower living standards
LO3

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Section 4 GDP and Economic Growth

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Macroeconomics

Gross Domestic Product and

Real GDP = (Nominal GDP/Price Index)*100

To find out, what is happening to people's living standards,

• Economic growth is an increase in the capacity of an

In the short run, an increase in AD may stimulate a rise in

 Improved standards of living

 A recession occurs when real GDP declines over a period

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