Chapter: 2 Economic Growth

Define Economic Growth:

An increase in the amount of goods and services produced per head of the population over a period of time. It also refers
to the increase in real GDP over time or the increase in national income over time.
GDP: It refers to the final market value of total output produced in an economy over a period of time.

How Is Economic Growth Measured?

Gross domestic product is the best way to measure economic growth. That's because it takes into account the country's
entire economic output. It includes all goods and services that businesses in the country produce for sale. It doesn't matter
whether they are sold domestically or overseas.GDP measures final production. It doesn't include the parts that are
manufactured to make a product. It includes exports because they are produced in the country. Imports are subtracted
from economic growth.

What is meant by standard of living?

It refers to the quality of life enjoyed by an average individual in terms of income, consumption etc. the standard of living
is measured using real GDP per capita.

Real GDP per capita / real income per head = real GDP / total population

Limitations of GDP as a measure of growth

• Rate of inflation: if the rate of inflation is higher than the rate of increase in the GDP, the real income per head
will fall. Therefore, an increase in income per head will not lead to an increase in the standard of living. The
increase in the value of national income could have been brought about by a high rate of inflation. Output in the
economy will only increase if the rate of increase in money GDP has been greater than the inflation rate. This
problem can be overcome by calculating real GDP as measure of growth.
• Composition of goods produced: If an increase in GDP is brought about by an increase in the production of
demerit goods or higher spending on defense, it will not improve people’s living standards.
• Hidden economy: the existence of hidden or informal economy results into unrecorded income, for which the
true value of GDP may not be understand.
• Changes in population: although GDP can be increasing for a country, the population can also be increasing at a
greater rate. Economist often measure GDP per capita or income per head to counter this.
• Inaccurate data: Inaccuracy of national income statistics make it difficult to give a precise figure for the change
in income over time.
• The value of home produced goods:Certain groups of people rely on their own produce to live. It is not traded
and thus the economic activity is not recorded. This understates the value of GDP.
• GDP and Living standards: GDP is used to measure living standards. However, just because GDP rises, it does
not automatically mean that living standards have also risen. Other factors have to be taken into account such as:
the amount of leisure time people have, the way extra income is shared between the population, the quality
of goods and services.
• External costs: GDP does not take into account external costs such environment costs. For example the price of
plastic is cheap because it does not include the cost of disposal. As a result, GDP does not measure how these
costs impact on the well-being of society.

Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)

IGCSE Economics 1
Impact of Economic growth
Benefits:

• Improvement in standards of living: Increases in GDP leads to higher real income per head. Thus, standards of
living increases as people consume more goods and services.
• Higher average incomes:This enables consumers to enjoy more goods and services and enjoy better standards of
living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty
and enabling a rise in life expectancy.
• Lower government borrowing: Economic growth creates higher tax revenues, and there is less need to spend
money on benefits such as unemployment benefit. Therefore, economic growth helps to reduce government
borrowing.
• Lower unemployment: With higher output and positive economic growth, firms tend to employ more workers
creating more employment.
• Increased investment: Economic growth encourages firms to invest, in order to meet future demand. Higher
investment increases the scope for future economic growth – creating a virtuous cycle of economic
growth/investment.
• Reduce poverty: If incomes rise the government can collect more tax revenue which can be spent on programs to
alleviate poverty or improve public services such as healthcare, education, transport and environment. People can
have more work available and can increase their income level which will reduce their poverties.

Evaluation of economic growth: It depends on the nature of economic growth. For example, if economic growth leads to
more pollution and congestion, then living standards may not seem to hit. It also depends on the distribution of economic
growth – who benefits from the economic growth. If growth benefits primarily the richest in society, growth may do little
to overcome poverty.

Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)

IGCSE Economics 2
Note:

Costs / criticisms:

• Inflation: If the economy grows too quickly there is danger of inflation as demand races ahead of the ability of
the economy to supply goods and services or if Aggregate Demand (AD) increases faster than Aggregate Supply
(AS), then economic growth will lead to higher inflation as firms put up prices.
• Environmental costs: Increased economic growth will lead to increased output and consumption. This causes an
increase in pollution. Increased pollution from economic growth will cause health problems such as asthma and
therefore will reduce the quality of life. Economic growth also means greater use of raw materials and can speed

Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)

IGCSE Economics 3
 up depletion of non-renewable resources. Economic growth can also lead to problems of congestion as more
people can afford to buy a car, but it is hard to increase the supply of roads to meet demand.
• Inequality: Higher rates of economic growth have often resulted in increased inequality because growth can
benefit a small section of society more than others. For example, those with assets and wealth will see a
proportionally bigger rise in the market value of rents and their wealth. Those unskilled without wealth may
benefit much less from growth.
• Unsustainable growth: Certain non-renewable resources such as oil, gas and iron-ore may run out more rapidly.
This will lead to fewer resources for future generations. When this happens growth is said to be unsustainable.

• Unfavorable Balance of payments: With rising income, peoples’ standard of living rises and so does their
demand for foreign products and services. If the volume of imports is higher than the volume of exports then it
will have an unfavorable effect on the current account of the balance of payments.

Evaluation: It depends on the nature of economic growth. If growth is balanced and sustainable, then it can occur without
inflation. Also, the environmental costs of economic growth can be minimised through the better use of technology.

The Economic cycle (Business cycle)

The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for
analyzing the economy. It can also help to make better financial decisions.

It is the downward and upward movement of gross domestic product around its long- term growth trend.

There are four stages of business cycle: a) boom b) downturn c) recession d) recovery

a) Boom (peak of the cycle):The peak of the cycle is called a boom. Daring a boom GDP is growing fast becausethe
economy is performing well. Existing firms will he expanding and new firms willbe entering the market. Demand
will be rising, jobs will be created. wages will berising and theprofits made by firms will be rising. However,
prices may also berising.
b) Downturn:A boom will be followed by a downturn. The economy is still growing but at aslower rate. Demand
for goods and services will flatten out or begin to fall. Unemployment will start to rise and wage increases will
slow down. Many firmswill stop expanding. profits may fall and some firms will leave the market. Priceswill rise
more slowly.

Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)

IGCSE Economics 4
 c) Recession or depression:At the bottom, oi the economic cycle GDP may be Hut. if GDP starts to fall, thebottom
of the cycle may be referred to as a depression or slump. Such a period isoften associated with hardship.
Demand will start to fall for many goods andservices — particularly non-essentials. Unemployment. rises sharply,
businessconfidence is very low. bankruptcies rise and prices become flat. The prices of somethings may even fall.
A less severe version of a depression is a recession.
d) Recovery:When GDP starts to rise again there is a recovery or an upswing in the economy.Businesses and
consumers regain their confidence and economic activity is onthe increase. Demand starts to rise, unemployment
begins to fall and prices start torise again.

Note: Recession means period of temporary economic decline during which trade and industrial activity are
reduced, generally identified by a fall in GDP in two successive quarters.

Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)

IGCSE Economics 5
Course Instructor: ParthaBhattacharjee (MBA & MS. in Economics)
IGCSE Economics 6