Economic Growth
Why is economic growth a macroeconomic objective?: It enables an increase in the availability of
resources in an economy which increases living standards, incomes etc. It can be argued that other
objectives such as the control of inflation and the maintenance of full employment are necessary as
short run objectives to achieve long run economic growth.
Long Run Economic Growth: the expansion of the productive capacity of an economy
● Characterised as an outward shift of the PPC - enables a society to produce more goods and
services in any given period as a result of an expansion in its resources
● Shown by an outwards shift of SRAS or AD
Causes: either an increase in the quantity of factors or production or an improvement in their
efficiency or total factor productivity (the average productivity of all factors measured as total output
divided by total inputs)
● Government spending on education (to re-skill the population and reduce structural
unemployment) and infrastructure (which increases efficiency of transport / production for
firms and increases quantity and quality of capital stock)
● Technological advancements - increase in competitiveness and enlarges output / speed of
production
● Subsidies / tax allowances to increase the incentive for firms to invest - can be spend on new
capital / sites
● Reducing marginal rate of income tax - increases the incentive to work as more disposable
income can be retained - laffer curve ideas.
● Market based SSPs: reduction in corporation tax, privatisation to increase competition which
increases efficiency allowing firms to lower costs of production, deregulation
● Trade liberalisation: removal of trade barriers such as tariffs and quotas to promote
international competition - firms aim to invest and lower COPs to charge lower prices than
rivals which increases productive efficiency
● Increases in labour productivity (measured by output per worker or output per hour worked)
through increase in skills of the workforce through education and strong healthcare system
Short Run Economic Growth: an increase in actual GDP in response to an increase in AD
or an improvement in utilisation of FOPs
● Can be thought of as an economy operating inside its PPC moving towards the PPC from
within it - the economy was failing to use all its FOPs effectively so a movetowards the PPC is
possible when employment rises and output rises as a result.
, ● The actual rate of GDP growth may reflect an increased utilisation of the factors of production
which is not the same as an increase in potential GDP - changes in GDP do not necessarily
measure long-run economic growth
● Shown by an outwards shift of LRAS
Causes either an increase in AD due to an increase in any C+I+G+(X-M) or an increase in SRAS due
to a fall in COPs
● Cut in interest rates which reduces the cost of borrowing encouraging consumption, reduces
monthly payments which increases disposable income and increases investment
● Government reduction in marginal rate of income tax for those in lower income tax bands or
increase income tax free allowance - increases the disposable income for those on lower
incomes who had a higher marginal propensity to consume as most of income is devoted to
subsistence consumption.
● Fall in corporation tax which decreases costs of production and increases marginal propensity
to invest as it is easier to finance borrowing
● Increase in government spending on infrastructure, healthcare etc - generates multiplier effect
● Weakened exchange rate - fall in interest rate could increase hot money outflows - weak
pound increases net exports causing an increase in AD
GDP (gross domestic product):
GDP: a way of measuring the total output of an economy over a period of time - economic growth can
be measured through the rate of change of GDP (percentage change in real GDP over a specific
period of time)
Real GDP: GDP at constant prices, taking account of changing prices through time
Nominal GDP: GDP at current prices, taking no account of changing prices through time.
GNI: GDP plus net income from abroad - takes into account income flows between countries as
domestic residents also receive some income from abroad - GDP only focuses on the domestic
economy.
Percentage change = (new - original) / original x 100
GDP per capita = GDP / population
100 x (nominal value / price index) = real value
● GDP is provided on a quarterly basis and can vary with seasons of the year - these
fluctuations are accounted for by seasonal adjustment which smooths out seasonal
fluctuations to reveal the underlying trend in GDP.
Benefits of Using National Income Statistics such as GDP:
● Useful in informing economic policy by acting as an indicator of output and living standards
● Allows politicians to see whether macroeconomic objectives are being met
● Allows gov and businesses to build forecasting models determining future decisions on
investment and spending
● Can be used as a benchmark to evaluate living standards - a rise in national income is often
interpreted as a rise in living standards of all
Problems with using real GDP to measure economic growth:
● Required a large amount of data which comes from varying sources - may lead to
inaccuracies in data
● Informal economy is unrecorded economic activity and may mean especially for developing
countries that GDP figures are lower than they should be - for example unlicensed business,
subsistence agriculture etc will be unrecorded - may act as information failure for
governments when choosing policy measures
Why is economic growth a macroeconomic objective?: It enables an increase in the availability of
resources in an economy which increases living standards, incomes etc. It can be argued that other
objectives such as the control of inflation and the maintenance of full employment are necessary as
short run objectives to achieve long run economic growth.
Long Run Economic Growth: the expansion of the productive capacity of an economy
● Characterised as an outward shift of the PPC - enables a society to produce more goods and
services in any given period as a result of an expansion in its resources
● Shown by an outwards shift of SRAS or AD
Causes: either an increase in the quantity of factors or production or an improvement in their
efficiency or total factor productivity (the average productivity of all factors measured as total output
divided by total inputs)
● Government spending on education (to re-skill the population and reduce structural
unemployment) and infrastructure (which increases efficiency of transport / production for
firms and increases quantity and quality of capital stock)
● Technological advancements - increase in competitiveness and enlarges output / speed of
production
● Subsidies / tax allowances to increase the incentive for firms to invest - can be spend on new
capital / sites
● Reducing marginal rate of income tax - increases the incentive to work as more disposable
income can be retained - laffer curve ideas.
● Market based SSPs: reduction in corporation tax, privatisation to increase competition which
increases efficiency allowing firms to lower costs of production, deregulation
● Trade liberalisation: removal of trade barriers such as tariffs and quotas to promote
international competition - firms aim to invest and lower COPs to charge lower prices than
rivals which increases productive efficiency
● Increases in labour productivity (measured by output per worker or output per hour worked)
through increase in skills of the workforce through education and strong healthcare system
Short Run Economic Growth: an increase in actual GDP in response to an increase in AD
or an improvement in utilisation of FOPs
● Can be thought of as an economy operating inside its PPC moving towards the PPC from
within it - the economy was failing to use all its FOPs effectively so a movetowards the PPC is
possible when employment rises and output rises as a result.
, ● The actual rate of GDP growth may reflect an increased utilisation of the factors of production
which is not the same as an increase in potential GDP - changes in GDP do not necessarily
measure long-run economic growth
● Shown by an outwards shift of LRAS
Causes either an increase in AD due to an increase in any C+I+G+(X-M) or an increase in SRAS due
to a fall in COPs
● Cut in interest rates which reduces the cost of borrowing encouraging consumption, reduces
monthly payments which increases disposable income and increases investment
● Government reduction in marginal rate of income tax for those in lower income tax bands or
increase income tax free allowance - increases the disposable income for those on lower
incomes who had a higher marginal propensity to consume as most of income is devoted to
subsistence consumption.
● Fall in corporation tax which decreases costs of production and increases marginal propensity
to invest as it is easier to finance borrowing
● Increase in government spending on infrastructure, healthcare etc - generates multiplier effect
● Weakened exchange rate - fall in interest rate could increase hot money outflows - weak
pound increases net exports causing an increase in AD
GDP (gross domestic product):
GDP: a way of measuring the total output of an economy over a period of time - economic growth can
be measured through the rate of change of GDP (percentage change in real GDP over a specific
period of time)
Real GDP: GDP at constant prices, taking account of changing prices through time
Nominal GDP: GDP at current prices, taking no account of changing prices through time.
GNI: GDP plus net income from abroad - takes into account income flows between countries as
domestic residents also receive some income from abroad - GDP only focuses on the domestic
economy.
Percentage change = (new - original) / original x 100
GDP per capita = GDP / population
100 x (nominal value / price index) = real value
● GDP is provided on a quarterly basis and can vary with seasons of the year - these
fluctuations are accounted for by seasonal adjustment which smooths out seasonal
fluctuations to reveal the underlying trend in GDP.
Benefits of Using National Income Statistics such as GDP:
● Useful in informing economic policy by acting as an indicator of output and living standards
● Allows politicians to see whether macroeconomic objectives are being met
● Allows gov and businesses to build forecasting models determining future decisions on
investment and spending
● Can be used as a benchmark to evaluate living standards - a rise in national income is often
interpreted as a rise in living standards of all
Problems with using real GDP to measure economic growth:
● Required a large amount of data which comes from varying sources - may lead to
inaccuracies in data
● Informal economy is unrecorded economic activity and may mean especially for developing
countries that GDP figures are lower than they should be - for example unlicensed business,
subsistence agriculture etc will be unrecorded - may act as information failure for
governments when choosing policy measures
