IGCSE®/O Level Economics 6.3 Output and growth

Measuring economic activity Resources are used to produce goods and services. But how can we measure how the total output of goods and services grows or changes over time? We can therefore measure total output in three ways because the value of output is also equal to the total amount spent on purchasing it, which in turn is used to pay for the resources used to produce it, i.e. factor incomes including wages and any profits national output = national income = national expenditure

Gross domestic product The total value of output produced in an economy is its gross domestic product (GDP) As prices rise the total value of output or nominal GDP will also rise, but there may be no actual increase in the volume of goods and services produced If the volume of goods and services expands, then the real GDP will have increased Year 1 Year 2 GDP = $100bn GDP = $110bn Year 1 Year 2 GDP = $100bn GDP = $110bn Inflation was only 3% so there has been a 7% increase in real GDP But inflation was 10% so there has been no change in real GDP

Economic growth …is measured by the rate of increase in real GDP each period (i.e. the change in nominal GDP adjusted for price inflation over the same period)

Achieving long-term growth Long-term growth in an economy is achieved by expanding its productive potential: the discovery of more natural resources investment in new capital goods and infrastructure technical progress, including the discovery of new man-made materials and more efficient equipment, processes and products increasing the amount and quality of labour through more and better health care, education and training a more efficient allocation of resources

Growth cycles All countries experience cyclical fluctuations in their rate of economic growth over time

The economic cycle The economic cycle Economic recovery: real GDP grows faster than normal. Demand for goods and services rises rapidly. Firms increase output and hire more workers. Profits and other incomes rise Economic boom: demand for goods and services rises faster than output can rise. Profits peak and prices rise as economy ‘overheats’ Economic recession: real GDP falls. Demand for goods and services falls. Firms cut their production and lay off workers. Profits and other incomes fall

Short-lived, long-lived or double-dip recession? A U-shaped economic recession A V-shaped economic recession A double-dip recession

Economic growth or economic welfare? The benefits of economic growth are: more goods and services, more wants satisfied increased employment opportunities and incomes increased sales, profits and business opportunities low price inflation if output growth keeps pace with demand increasing tax revenues for a government to improve public services and public infrastructure improved living standards Possible problems with growth are: technical progress may replace labour with machines scarce resources are used up at a faster rate increasing pollution and damage to natural environment people are not necessarily better off if growth is achieved, for example by producing more weapons, cigarettes, coal-fired power stations or even more cars, televisions and computer games Progress at any price?

Measuring economic welfare Simply measuring and monitoring the rate at which real output grows over time reveals very little about how standards of living are changing, if growth is sustainable, and whether economic welfare is improving. Here are two possible measures of living standards: Real GDP per capita A measure of the average income per person. If real GDP grows but the population increases at a faster rate then average income per head will fall. But it takes no account of: how income is distributed (a few very rich people can skew the average upwards) what people can buy (the availability of goods and services may be poor) the quality of and access to education, health care, clean water and sanitation the impact of growth on the natural environment Human Development Index (HDI) A wider measure that includes: real GDP per capita (adjusted for differences in exchange rates between countries) level of education (how many years on average a person aged 25 will have spent in education and how many years a young child entering school now can be expected to spend in education during his or her life) access to health care and having a healthy lifestyle (measured by life expectancy)

There are wide disparities in human and economic development Source: UNDP