Economics - Economic growth

Economic growth involves expanding national productive capacity and an increase in the quantity of goods and services produced by an economy over time. This should result in an increase in the standard of living. It is measured by changes in GDP.
How economic growth increases standard of living
1. Economic growth means increasing the capacity of the economy to satisfy people's material needs and wants.
2. This should mean increasing living standards if the increase in productive capacity is faster than population growth.
3. A growing economy is in a superior position to meet new needs and resolve socio‑economic problems. Growth lessens the burden of scarcity.
4. However, one can’t assume that greater material abundance means improved living standards for all. The extent to which everyone shares in economic growth is a matter of how well a nation achieves equity in income distribution.
5. This means greater material abundance and a more satisfying resolution of the economic problem.
Measure of economic growth
1. Economic growth is measured by changes in GDP
2. Real GDP
  1. Real GDP is a measure of the total output of final goods & services after adjusting for price changes. This definition allows for the effect of inflation.
  2. Real GDP per capita
    1. In this measure of economic growth, both inflation and population growth are taken into account . If real GDP per capita increases, the standard of living increases
3. Weaknesses of GDP as a measure of economic growth
  1. GDP does not describe how the benefits of growth (greater income and wealth) are distributed throughout the community.
    1. Increasing output does not necessarily mean there is an increase in the standard of living for everybody (some people are better/worse off than others)
  2. GDP measures the value of goods and services which are exchanged in the market, but takes no account of the non-market production that makes up a significant component of our welfare such as housework, charity work, voluntary work. Hence, it understates the true value of output and work
  3. GDP statistics do not measure changes in overseas trading relationships, particularly the link between the prices received for exports and prices paid for imports (terms of Trade)
    1. Too much spent on imports and too little received on exports = loss in money
  4. GDP data measures the traded aspects of material welfare, but says little about non material (quality of life) aspects of our welfare such as life expectancy, educational and medical services and even intangible wants such as freedom of speech
  5. GDP does not measure the cash economy (unreported transactions)
Sources of economic growth
1. The rate of growth is influenced by the following factors:
  1. The rate of population change
  2. The rate of increase in capital equipment per worker
  3. Technological progress and the application of new ideas to the productive process
  4. Improvement in the skills and productivity of the labour force
  5. The size of the natural resource base
  6. The capacity of an economy to change
  7. The willingness of an economy to trade with overseas countries
Supply, demand and allocative factors affecting growth
1. Growth depends on:
  1. Expanding productive capacity by:
    1. increasing quantity of resources
    2. improving quality of resources
    3. technological progress which raises productivity
  2. Extent to which nations utilise productive capacity which depends on the
    1. efficiency of the economic system
    2. development and expansion of markets
    3. degree and nature of government intervention in the economy
    4. social, political and cultural environment
2. Supply factors
  1. cause a rightward shift of the aggregate supply curve
3. Demand factors
  1. Demand factors refer to markets for the output of production. Economic growth depends on increasing the sale of goods and services created by the productive process. This depends on developing new and existing markets, both domestically and internationally. Domestic markets grow with population growth and social and demographic changes. Overseas markets depend on population and economic growth in other countries and how open their economies are. The process of opening up of world markets so more international trade can take place is called Globalisation
4. Allocative factors
  1. Allocative factors relate to the efficiency of the economic system within a country. Allocative efficiency refers to how efficiently a nation uses its resources. An efficient economic system produces more goods and services than an inefficient one from a given quantity of resources, i.e. it achieves higher productivity. For an economy to be operating on or near its PPF it must be efficiently using its resources. This means allowing the price mechanism to allocate resources to where the best returns are, i.e. their most valued uses. It involves removing impediments to the flow of goods and services and factors of production in product and factor markets
Benefits of economic growth
1. Increased consumption and expansion of choice (more wants satisfied). Possible increase in quality of goods and services. Therefore, an increase in the standard of living
2. Increased employment opportunities which leads to decreased government expenditure on unemployment benefits (re-direct elsewhere e.g. social overhead capital such as community infrastructure
3. More equitable wealth distribution due to more people having higher paying jobs and therefore, less people are on low levels of income
4. Increased technology and increased efficiency of production methods. This creates better quality goods and services, often at cheaper prices
5. Increased longevity (life span) because of better health and education services.
6. Improved working conditions and job satisfaction. Employees get tasks done more efficiently/quickly and therefore, increase leisure time. Improvements/advancements in technology results in less strenuous labour and therefore, working conditions are improved
7. Better resource allocation.
8. Expands capacity to remedy environmental damage. Advances in technology allow us to reduce the amount of pollution produced.
Costs of economic growth
1. structural unemployment and long term unemployment.
  1. People lose their jobs as they are replaced by machines/development
  2. the goods they once produced have become obsolete
  3. some people’s skills are no longer relevant, have a lack of skills, lack education
2. Negative externalities which can be reduced by the application of government policies
3. inflation may increase, both cost-push and demand pull
  1. people spend more money as they have greater confidence in the economy. This increase in consumption causes for shortages to occur which increases prices
  2. people make purchases on credit which increases inflation
4. pollution – air, water, noise
  1. due to increases in output
5. social problems created by unemployment
  1. have to be corrected by government expenditure
6. resource depletion
  1. resources are finite
Current and target rates
1. Target: 3.25-3.5%
2. current rate: 3.3%

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