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Economic Growth

Economic Growth. How do we measure growth?. Economic growth refers to the increase in the amount of goods ands services the whole economy can produce over and above what it produced last year. It is measured by seeing how much the GDP (national income) has increased every year in a country.

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Economic Growth

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  1. Economic Growth

  2. How do we measure growth? • Economic growth refers to the increase in the amount of goods ands services the whole economy can produce over and above what it produced last year. • It is measured by seeing how much the GDP (national income) has increased every year in a country.

  3. However, when prices rise, so do company’s revenues making incomes to rise without any more goods and services being produced. • When prices rise there may be no real growth in output or incomes. • Economists say this represents a rise in nominal or money GDP but without growth in real GDP. • So, to find out by how much real output has changed, the effects of inflation must be taken into account.

  4. For Economists, people are only better of if real GDP per capita, that is, real income per head, increases. • This is calculated by dividing the real GDO of an economy by the size of its population.

  5. Does economic growth really makes us better off? • If there is an increase in real output, there is Economic growth. • However, whether people have higher living standards really depends on which goods and services have increased in supply. • If, for e.g., the Govt builds more nuclear weapons, total output would have increased by most people would not have seen themselves better off. • Also, if any increase in real output is simply shared out among a few rich people, the vast majority of the people in the economy will be no better off. • People might even become worse if the population of the economy increases and goods and serves becomes shared among more and more people. In this case GDP per capita will fall, thus negative Economic growth.

  6. How to achieve growth? • The discovery of more natural resources • Investment in capital – more can be produced, lowering interest rates • Technical progress • Increasing the amount and quality of HR – investment in people – education and training, improving health care • Reallocation of resources

  7. Economic Possibility Frontier

  8. Benefits of growth • Higher level of consumption for all to enjoy providing they have money to afford it. • Higher levels of output can probably be achieved using less labor. People may benefit from shorter working weeks and longer holidays. • Rising incomes mean more tax revenue for the Govt.

  9. Costs of growth • Opportunity cost of growth. Economic growth may be achieved by producing more capital goods now at the expense of less consumer goods, vice versa. • Use up of scarce resources more quickly. • Increase in pollution and less land available for parks and other recreational activities. • Technical progress may replace workers with machines.

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