Economic growth Learning outcome V Define economic growth SBC Economics Economic growth Learning outcome V Define economic growth Explain the difference between GNP and GDP Describe the measures used to indicate economic growth Explain the business cycle Explain the trend rate and the output gap Explain the determinants of economic growth Evaluate the costs and benefits of economic growth Reading: Unit 26

Economic growth Economic growth is an increase in the level of national output National output can be increased if there is an increase in the quantity or quality of inputs to the production process National output can be increased if inputs are used more efficiently This can be shown as a production function

Economic growth Production function Output = f (land), f (labour), f (capital), f (technological progress), f (efficiency)

Economic growth In order therefore for an economy to grow there must be a greater amount or better use of land, labour and capital Growth can also come from technological progress

Land Land includes all natural resources (not just land itself) Different countries have different endowments of land Some nations rely heavily on exploiting their natural resources to develop i.e. Saudi Arabian oil

Which natural resources is China endowed with? Land: Question Which natural resources is China endowed with?

Labour Increasing the numbers of workers in the economy should lead to growth, this can be achieved through: Changes in demography i.e. the number of people entering or leaving the labour force Increases in the participation rates i.e. how many people who could work do work, such as women who choose to stay at home Immigration i.e. the number of people coming from foreign countries to enter the labour force

Labour Workers can be made more productive, this is known as increases in human capital Human capital is important as: Workers need to be educated enough to be able to cope with their jobs Workers need to be flexible Workers need to be able to contribute to change

Capital If economic growth is to be sustained there must also be an increase in the stock of capital There must be sustained investment in the economy i.e. the investment made by the government in building the Three Gorges Dam To contribute to economic growth the investment must be well targeted (show a good rate of return)

Technological progress Technology contributes to growth in two ways: It reduces average production costs i.e. more efficient machinery or the use of computers to do complex tasks It creates new products for the market which consumers spend their income on i.e. many people now own a mobile phone, this wasn’t the case fifteen years ago

Question If you wished to get an understanding of the change in living standards in a country would the total GDP or the GDP per capita be a more useful figure? Why?