Economic growth

What is economic growth —— GDP

• Economic growth is an increase in the amount of the goods and services produced over a period of time. → GDP/Output

• Gross Domestic Product: The total output produced in a country.
• GDP=C+I+G+(X-M)

• Three methods of measuring output: Output, Income&Expenditure

Explaining Economic growth

PPC —— Production Possibility Curve

Business Cycle

Circular Flow

• Definition：The movement of expenditure, income and country around the country.

How to calculate GDP

1. The output method

• Add up the output produced by all industries in the country

• Value Added: The difference between the sales revenue revenue received and the cost of raw material used.

2. The income method

• All income s that have been earned in producing the country’s output

3. The expenditure method

• Add up all the expenditure on the country’s finished goods

Measurements of Economic growth

Nominal GDP and Real GDP

• Nominal GDP is the value of all goods and services produced within a country using current market prices. → Misleading

• Real GDP adjusts for inflation and reflects the value of goods and services at constant prices, using a base year for comparison. → Accurate

Why Nominal GDP is misleading?

Amount	Single price	Nominal GDP
100	30,000	3,000,000
100	32,000	3,200,000

Same amount higher GDP → misleading

Nominal growth rate are much higher than Real growth Rate

GDP Per Capita

Change in GDP Per Capita

• Positive Change Rate → Growing Faster

• Negative Change Rate → Growing Slower

Causes of economic growth

1. Discovery of more natural resources → More production capacity

2. Investment in new capital and infrastructure → machinery, buildings and technology

3. Technical progress → increase productivity

4. Increasing the quantity and quality of factors of production → More skilled HR and good quality capital

5. Reallocating resources → less to more-productive

Consequences of economic growth

I. Benefits

1. Increase government tax revenue

2. Increase employment & improve the living standard

3. More goods & services available

4. Decrease in level of poverty

II. Drawbacks

1. Rise in unemployment

2. Natural resources depletes

3. Cause external externalities

4. May cause inflational

Policies to promote economic growth

1. Expansionary Fiscal Policy

2. Expansionary Monetary Policy

Recession

• A period with a significant decline in economic activity characterized by falling GDP, rising unemployment and a decline in real incomes (two consecutive quarters)

Causes of recession

1. Decrease in aggregate demand

• Also known as demand-side shocks

• AD=C+I+G+(X-M)
• Consumption Decrease
• Investment Decrease
• Government Spendings Decrease
• Net Export Decrease

• Solution:
1. Expansionary Monetary Policy
1. Increase Money Supply → Increase Consumption
2. Lower Interest Rate → Increase Investment(Lower Cost)
2. Expansionary Fiscal Policy
1. Lower Tax Rate → Increase Investment
2. Higher Government Spending

2. Decrease in aggregate supply

• Also known as negative supply-side shocks
• Rise in fuel coasts
• Rise in raw material costs

• Result:
• Increase the firms’ production costs
• Result in producing less

• Solution:
• Increase in efficiency of production
• Increase quantity & quality produced

Consequences of Recession

1. Firms go out of business → Demand fall, firms are forced to reduce peoduction
2. Higher unemployment rate → Production cuts cause unemployment
3. Fall in income → Production costs cause income loss
4. Increase in poverty & inequality → Low income, unemployment
5. Fall in asset prices → Fall in House/Stock Price