GROWTH DEFINITIONS “ The ability of an economy to satisfy consumer wants by producing more goods and services over a period of time”. “Economic growth is the long-run expansion of the economy’s ability to produce goods & services. “ Economic growth is an increase in the productive capacity of an economy, whether this capacity is fully used or not .” “The ability of a country’s economy to improve the standards of living of it’s inhabitants”

GROWTH The above mentioned definitions can be grouped under 3 different categories: 1] REAL INCOME: This includes the actual economic output i.e number of goods & services produced. 2] PRODUCTIVE CAPACITY: This is a measure of an economy’s actual potential. Rather than looking at the actual output of an economy, the potential of an economy is assessed. 3] NET SOCIAL WELFARE: The measure attempts to include the ‘quality of life factors’. This measure also includes non-economic factors in addition-eg: environment, entertainment, health etc. an example of one such measure is HDI (Human Development Index)

FIRMS REAL INCOME DEFINITION The two-sector circular flow model shows the definition of economic growth based on real income. INCOME LABOUR HOUSEHOLD SECTOR FIRMS PAYMENT FOR G & S GOODS & SERVICES FROM THE ABOVE MODEL IT CAN BE SEEN THAT THE OUTPUT OF AN ECONOMY MUST EQUAL THE INCOME OF THE HOUSEHOLDS. THIS MEASURE IS KNOWN AS THE GDP ( Gross Domestic Product).

Measure of growth A simple way of measuring growth is to use a measure called GROSS DOMESTIC PRODUCT (GDP). Some world organisations refer to it as GROSS NATIONAL PRODUCT (GNP). It measures the value of the output of all final goods and services in a year. All countries adopt this method and thus is useful in comparing the value of output between countries and also within the same country over a period of time

NOMINAL GDP vs REAL GDP Nominal GDP is the current money value of GDP in an economy. It is calculated by multiplying the QUANTITY of goods & services produced (Q), by the current PRICE (P) of those goods & services. Any increase in Quantity of G & S produced will increase GDP. Any increase in Price will also increase GDP figures. Such increase cannot be considered growth. Only increase resulting from higher production with or without price increase is considered as “growth” Thus an increase in NOMINAL GDP could mean that: 1] Production has increased but less than the GDP figure suggests. 2] Production has not increased at all, or 3] Production has decreased.

REAL GDP We use the term ‘REAL’ when the statistics have been adjusted for PRICE increases (inflation). To calculate REAL GDP, we multiply the QUANTITY of each good by the price of that good in a base year. Thus, it ignores the changes in price level NOMINAL GDP = Q x Pc (Current Prices) REAL GDP = Q x Pb (Base year Price)

CALCULATIONS – REAL GDP Nominal GDP (Year x) Price Index in the base year X Real GDP (Year x) = Price Index (Year x) Real GDP X 100 Growth Rate = Previous Year Real GDP % Current Year – Previous Year X 100 = Previous Year

SIMPLE CALCULATION OF REAL GDP GOOD A GOOD B GDP NOMINAL GDP REAL YEAR 1990 1991 Q P($) Q P($) 4 5 5 3 35 35 4 7 6 3 46 38 1992 1993 1994 1995 5 8 5 10 6 11 5 4 6 4 7 5 8 6

Calculating Real GDP using CPI Year Nominal GDP ($m) CPI Real GDP ($m) Growth Rate (%) 1 1000 - 2 1500 1200 1250 25% 3 1600 4 5 1750 1800 1280 2.4% 1067 -16.7% 972 -8.9%

PRODUCTIVE CAPACITY