GLOWING AGES ACADEMY SECONDARY PHASE

SUBJECT: ECONOMICS CLASS

NAME: YEAR 11
TOPIC: ECONOMIC GROWTH
WEEK 1

WALT

 Define Economic growth

 Identify real GDP, Nominal GDP, and GDP per
capital
 Explain the causes of economic growth
 Discuss the benefits of economic growth
 Identify the concept recession

Economic growth is an increase in the amount of

goods and services produced per head of the
population over a period of time.
The total value of output of goods and services
produced is known as the national output. This can
be calculated in three ways: using output, income
or expenditure.
GDP (Gross Domestic Product): the total market
value of all final goods and services provided
within an economy by its factors of production in a
given period of time.
Nominal GDP: the value of output produced in an
economy in a period of time, measured at their
current market values or prices is the nominal GDP.
Real GDP: the value of output produced in an
economy in a period of time, measured assuming
the prices are unchanged over time. This GDP, in
constant prices, provides a measure of the real
output of a country.
GDP per head/capita: this measures the average
output/ income per person in an economy. Since
this takes into account the population, it provides
a good measure of the living standards of an
economy.
GDP per capita = GDP / Population
An increase in real GDP over time indicates
economic growth as goods and services produced
have increased. It indicates that the economy is
utilizing its resources better or its productive
capacity has increased. On a PPC, economic growth
will be shown by an outward shift of the PPC,
which is also called ‘potential growth’. ‘Actual
growth’ occurs when the economy moves from a
point inside the PPC to a point closer to the PPC.
 This diagram shows
‘actual growth’ as the economy realizes its
potential growth. In order to experience potential
economic growth, the PPC would have to shift
outwards.
Causes of economic growth
 Discovery of more natural resources: more
resources mean more the production capacity.
The discovery of oil and gas reserves have
enabled a lot of economies (Norway, Saudi
Arabia, Venezuela etc.) to grow rapidly.
 Investment in new capital and infrastructure:
investment in new machinery, buildings,
technology etc. has enabled firms and
economies to expand their production
capacities. Investment in modern
infrastructure such as airports, roads,
harbours etc. have improved access and
communication in economies, helping in
 achieving quicker and more efficient
production.
 Technical progress: New inventions, production
processes etc. can increase the productivity of
existing resources in industries and help boost
economic growth.
 Increasing the quantity and quality of factors
of production: A larger and more productive
workforce will increase GDP. More skilled,
knowledgeable and productive human
resources thus help increase economic growth.
Similarly, good quality capital, use of better
natural resources, innovative entrepreneurs all
aid economic growth in the long run.
 Reallocating resources: Moving resources from
less-productive uses to more-productive uses
will improve economic growth.

The benefits of economic growth:

 Greater availability of goods and services to
satisfy consumer wants and needs.
 Increased employment opportunities and
incomes.
 In underdeveloped or developing economies,
economic growth can drastically improve living
standards and bring people out of poverty.
  Increased sales, profits and business
opportunities.
 Rising output and demand will
encourage investment in capital goods for
further production, which will help achieve
long run economic growth.
 Low and stable inflation, if growth in output
matches growth in demand.
 Increased tax revenue for government (as
incomes and spending rise) that can be
invested in public goods and services.
The drawbacks of economic growth:
 Technical progress may cause capital to
replace labour, causing a rise
in unemployment. This will be disastrous for
highly populated underdeveloped and
developing economies, pulling more people
into poverty
 Scarce resources are used up rapidly when
production rises. Natural resources may get
depleted over time.
 Increasing production can increase negative
externalities such as pollution, deforestation,
health problems etc. Climate change is a
consequence of rapid global economic growth.
 If the economy produces over its productive
capacity and if the growth in demand outstrips
 the growth in output, economic growth may
cause inflation
 Economic growth has also been accused
of widening income inequalities in developing
economies, because rich investors and
businessmen gain more than the working class
and poor during growth – the benefits of
growth are not evenly distributed. This will
cause relative poverty to rise.
Governments aim for sustainable economic
growth which refers to a rate of growth which can
be maintained without creating significant
economic problems for future generations, such as
depletion of resources and a degraded natural
environment.
Recession
Recession is the phase where there is negative
economic growth, that is real GDP is falling. This
usually happens after there is rapid economic
growth. High inflation during the boom period will
cause consumer spending to fall and cause this
downturn. Workers will demand more wages as the
cost of living increase, and the price of raw
materials will also rise, leading to firms cutting
down production and laying off workers.
Unemployment starts to rise and incomes fall.
Causes of recession:
  Financial crises: if banks have a shortage of
liquidity, they reduce lending and this reduces
investment.
 Rise in interest rates: increases the cost of
borrowing and reduces demand.
 Fall in real wages: usually caused when wages
do not increase in line with inflation leading to
falling incomes and demand.
 Fall in consumer/business confidence: reduces
both supply and demand.
 Cut in govt. spending: when government cuts
spending, demand falls.
 Trade wars: uncertainty in markets, and thus
businesses will be reluctant to invest during a
trade war, causing supply to fall.
 Supply-side shocks: e.g. rise in oil prices cause
inflation and lower purchasing power.
 Black swan events: black swan events are
unexpected events that are very hard to
predict. For example, COVID-19 pandemic in
2020 which disrupted travel, supply chains and
normal business activity, as well consumer
demand, has caused recessions in many
countries.
Consequences of recession:
 Firms go out of business: as demand falls,
firms will be forced to either reduce production
to a level that is sustainable or close shop.
 Unemployment: cuts in production will cause a
lot of people to lose work.
 Fall in income: cuts in production also causes
fall in incomes.
 Rise in poverty and inequality: unemployment
and lack of incomes will pull a lot of people
into poverty, and increase inequality (as the
rich will still find ways to earn).
 Fall in asset prices (e.g. fall in house
prices/stock market): recessions trigger a
crash in the stock markets and other asset
markets as investors’ and consumers’
confidence in the well-being fall of the
economy during a recession. The shares owned
by investors will be worth less.
 Higher budget deficit: due to falling
consumption and incomes, the government will
see a fall in tax revenue, causing a budget
deficit to grow.
 Permanently lost output: as firms go out of
business and employment falls, it results in a
permanent loss of output, as the economy
moves inwards from its PPC.
 If the economy was
producing at A on its PPC, a recession will cause
production to fall to B.
Policies to promote economic growth
Expansionary fiscal and monetary policies
(demand-side policies) and supply-side
policies described in the previous sections can be
employed to promote economic growth, depending
on the nature of the problems that are holding
back the economy from growing. For example, if it
is the poor quality of human capital (labour) that is
preventing the economy from achieving its
maximum productive capacity, the government
should invest in education and vocational training
centres to improve the quality of the labour force
and increase productivity. If it is a lack of effective
demand causing slow growth, the government
should focus on cutting income taxes, indirect
taxes and interest rates to boost spending.
Effectiveness of such policies:
 Demand-side policies that increase the rate of
growth above the long-run trend rate will cause
inflation and quickly lead to a recession if not
controlled.
 Supply-side policies can take considerable time
to take effect. For example, if the government
invested in better education and training, it
could take several years for this to lead to
higher labour productivity.
 In a recession, supply-side policies won’t solve
the fundamental problem of deficiency of
aggregate demand. Increasing the flexibility of
labour markets and encouraging investment
may help to some extent, but unless there is
sufficient demand, firms will be reluctant to
increase production and make new
investments.