Chapter 1: Economic Growth and its limits

Chapter 1: Economic Growth and its limits

Introduction

I. Economic Growth and its causes

A. Economic growth
1. Defining and measuring economic growth

Economic growth is an increase in activity in an economy. It is often

measured as the rate of change of gross domestic product (GDP). It is a measure
of the total flow of goods and services produced by the economy over a specified
time period, normally a year or a quarter. The GDP per capita (= par tête) is also
used, especially to compare different countries.
Gross national product (GNP) is sometimes used as an alternative measure to gross
domestic product.
To compensate for changes in the value of money (inflation or deflation) the GDP or
GNP is usually given in "real" or inflation adjusted, terms rather than the actual
money figure compiled in a given year, which is called the nominal or current figure.

Activity:
1) Explain what is meant by “Gross” and “Domestic”.
Gross = Brut
Domestic = Intérieur
GDP is all the productions within the country’s borders

2) How is GDP calculated?

The sum of all the value added through the production of goods and services. VA =
SALES REVENUES (= CHIFFRE D’AFFAIRE, RECETTES) - PRODUCTION
PRICE/INTERMIDIATE PRODUCT

3) Explain what is meant by “per capita”

Par tête

4) How do you calculate the GDP per capita?

GDP/Population, He provides a measure of average income

5) What is the condition to improve it?

The GDP must increase faster than the population

6) Distinguish between “nominal GDP” and “real GDP”.

Nominal GDP : Don’t deduct the effect of inflation
Real GDP : Deduct the effect of inflation

7) Look at the graph (document 1) and describe the trend of economic

growth rates in the UK.
GDP is irregular, volatile. Economic rate is +. Most of the time GDP increases.

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Chapter 1: Economic Growth and its limits

8) Choose one year on the graph and express the annual growth rate.
In 2010, the UK GDP increases by about 2%.

Document 1: Real annual GDP growth (% change over previous

year)

Source: Office for National Statistics

2. Limits of GDP as a measure to economic growth

An obvious drawback (= inconvenient) of GDP is that it excludes the value of

work that is not performed for money. This is a highly arbitrary and misleading
exclusion. For example, most people perform unpaid chores in their households, and
many must care for other family members (especially children and elders). Some of
this household work can be “outsourced” to paid cleaners, nannies, and restaurants
(the richer you are, the more you can outsource), in which case it is included in GDP.
But if you “do it yourself”, then it doesn’t count!
Source: Economics for everyone, Jim Stanford

Activity:
1) Why is it “a highly arbitrary and misleading exclusion”?
The value of unpaid work performed by people in their house is exclusive from GDP,
it doesn’t count. But this work generates value/wealth. When the same work is
performed is outsourced and is paid work, it is included in the GDP.

2) Find another example of work that is not performed for money.

Volunteer work, non-profit-making association

3) Find examples of works that are performed for money but not included in
GDP.
Undeclared or illegal works. Tax-avoiding activities

4) Can GDP be interpreted as a measure of human well-being? Explain.

B. The causes of economic growth

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Chapter 1: Economic Growth and its limits

Economic growth is caused by improvements in the quantity and quality

of the factors of production that a country has available.
1. Improvement in the quantity of factors of production
Increases in the supply of labour can increase economic growth. Increases in the
population can increase the number of young people entering the labour force.
Increases in the population can also lead to an increase in market demand thus
stimulating production. However, if the population grows at a faster rate than the level
of GDP the GDP per capita will fall.
The labour force grows relatively slowly in normal circumstances, especially in a
mature economy like the UK, where the rate of natural population increase is slow.

The process of acquiring capital is called investment.

When we speak of investment, we are thinking of a real expenditure on buildings,
machinery and equipment, or any other tangible tools used in production.
Investment comes in different forms. The most important is private business
investment in FIXED CAPITAL. Governments invest in public infrastructure and
individuals invest in their own homes. Of all these investment flows, business fixed
investment is the largest; it is also the most important to the rise and fall of the overall
economy.
Source: “Economics for everyone”, Jim Stanford; “A2 Economics”, Peter Smith
Activity:
1) Define “labour force” and “investment”.
Labour force = Number of people who are employed or in search of job. Investment =
The process of acquiring capital is called. (LORRY = CAMION)

2) What are the ways in which labour force can grow ?

- Demographics :
 Immigration (short term)
 Birth rate (medium term)
- Institutional factor :
 Increasing the retirement age
 Shorten the length of education
- Increase the share of the employed population
(Shortage = Pénurie)

3) Who invest ?
The government (public investment), private companies/firms and
individuals/households (house).

4) What is the most important form of investment ? Give examples.

Private business investment is the most important : technologies, buildings,
computer, communications, …

5) What can be private business’ motivations for making investment ?

Making more money, to make profit, they have to face competition, to remain
competitive they must invest, if they don’t do that, they are to go bankrupt.
 Improvement in the quantity of factors of production leads to extensive growth.

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2. Improvement in the quality of factors of production

The other way in which productive capacity can be increased is through improvement
in the efficiency with which factors of production can be utilised. Another way of
viewing this is to look for improvements in productivity that is often defined in terms of
labour productivity.
Source: “A2 Economics”, Peter Smith

Activity:
1) What are the ways to improve the efficiency of factors of production?
Distinguish between capital and labour.
More highly trained labour, competitiveness.

2) How is labour productivity usually measured?

Per worker/per hour.

3) Explain why again the role of investment is essential?

Investment is essential to improve personnel’s training.

3. Cultural factors
[Some] theorists, such as Thalcott Parsons (1979), think that cultural factors also act
as a barrier to [growth and] development. They argue that majority-world cultures are
based on collectivism and ascribed status. Both are counterproductive in creating the
kinds of entrepreneurial spirit needed to drive industrial growth. They ensure that
people are locked into small, rural communities and deprive industrialists of the
concentrated workforces needed to sustain factory-based production.
Such cultures tend to be backward-looking and attached to tradition, and this makes
them resistant to social change and progress.
Source: AQA Sociology, Nelson Thomas

Activity:
1) Suggest one cultural barrier to growth and development.
- In the caste system
- Feudal System

2) Give an example of value favourable to development.

4. The role of institutions (???)

Tremendous differences in incomes and standards of living exist today between
the rich and the poor countries of the world. Average per capita income in sub-
Saharan Africa, for example, is less than one-twentieth that in the United States. […]
Poor countries, such as those in sub-Saharan Africa, Central America, or South Asia,
often lack functioning markets, their populations are poorly educated, and their
machinery and technology are outdated or nonexistent. But these are only proximate
causes of poverty, begging the question of why these places don’t have better

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markets, better human capital, more investments, and better machinery and
technology. There must be some fundamental causes leading to these outcomes,
and via these channels, to extreme poverty. […]
Some societies have good institutions […]. These good institutions contrast with
conditions in many societies of the world, throughout history and today, where the
rule of law is applied selectively; property rights are nonexistent for the vast majority
of the population; the elites have unlimited political and economic power; and only a
small fraction of citizens have access to education, credit, and production
opportunities.
Source: Daron Acemoglu, “Root Causes. A historical approach to assessing the role
of institutions in economic development”, in Finance & Development, International
Monetary Fund (IMF), June 2003.

Questions:
1) Explain what an institution is.
- Sociology : a well-establishment and structured pattern of behaviour or of
relationships that is accepted as a fundamental part of a culture
- Any established law, custom, etc
2) Give some examples of institutions.

Family, Marriage, Education, Property rights (by laws), …

3) According to the document and what you know, how can better institutions
help undeveloped countries achieve economic prosperity and social
progress ?

II. Benefits and limits of economic growth

A. The benefits and costs of economic growth

1. The desirability of economic growth
Economic growth is an important objective of government policy because it is the key
to higher material standards of living. It is economic growth which has made it
possible for millions of people to escape from the miseries of long hours of back-
breaking work, deplorable living conditions, a low expectancy of life and other
features of low income societies.
From the government’s point of view, economic growth is desirable because it brings
in increasing revenues from a given structure of tax rates. It means that more and
better schools, hospitals and other social services can be provided without resorting
to the politically unpopular measure of raising the rate of taxation. Economic growth
also makes it easier (politically) to help the poor. If real income per head is rising, a
more than proportionate share can be allocated to low income groups.
Of great importance is the cumulative nature of economic growth. For example, a
country which maintains a growth rate of 3% per annum will achieve a doubling of

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real income in 24 years. It is this aspect of economic growth which explains why
relatively small differences in national economic growth rates can, in a matter of 10 or
15 years, lead to large absolute differences in living standards.[...]
There are a variety of ways in which the benefits of economic growth may be
enjoyed. By maintaining the same labour force working the same number of hours,
the society may enjoy the gains from its increased ability to produce in the form of
higher levels of consumption. Alternatively, since any given output can now be
produced with a smaller labour input, workers may decide to take part of their
improved living standards in the form of increased leisure. It would also be possible
to maintain consumption levels and reduce the proportion of the population at work
by extending the provisions for full-time education and/or reducing the age of
retirement.
Source: “Introductory Economics”, SJ Grant

Activity:
1) Explain “government policy”.
Set of ideas or plans that is used as a basis of mating decision, especially in
economics, politics, and business

2) What kind of policy could a government undertake to stimulate

economic growth?
It’s a demand-side policy by John Meynard Keynes to increase demand.

3) Explain how “a given output can be produced with a smaller labour

input”.
Improving productivity, efficiency

2. The costs of economic growth

Economic growth also gives rise to a variety of external costs. Rising incomes
make it possible for more people to own cars, but this could lead to problems of
pollution and traffic congestion. Natural resources, including the rainforests, may be
depleted at a rapid rate.
Modern industries may be very efficient on the basis of private costs but they may
impose external costs by destroying natural beauty and other amenities. Modern
methods of agriculture may greatly increase yields per acre, but they could have
damaging effects on wildlife. On the other hand, economic growth makes it possible
to devote more resources to the search for safer and cleaner methods of production.
Source: “Introductory Economics”, SJ Grant

Activity :
1) Explain “external cost”.
Costs caused by the actions of the organization, but borne in whole or in part by one
or more other economic agents. It’s a negative externality.

2) Do you think that economic growth is possible without damaging

environment ?
I think that economic growth is not possible without harming the environment
because in order to produce more, you have to pollute. Even if alternatives exist, they

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Chapter 1: Economic Growth and its limits

do not completely protect the environment. Cause methods used now are very
destructive for environment. Companies must innovate but it’s expensive. Renewable
energies (solar, wind, water), eco-product, energy-saving products , eco-friendly
products.

B. Climate change
http://www.bbc.com/news/science-environment-26810559

1. Explain climate change

2. Consequences of climate change

3. How to limit climate change?