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MEC152 Tutorial session 5

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6 views

MEC152 Tutorial session 5

Uploaded by

Ofentse Racodi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MEC152 Tutorial session 5

Topic 5: Economic Growth and Business Cycles


Economic growth

▪ Economic growth is the sustained increase in an economy's production of goods and


services over time.
▪ It represents a key measure of progress and is often quantified by the rise in the gross
domestic product (GDP).
▪ Economic growth signifies an expansion of a nation's capacity to create wealth, which, in
turn, enhances the living standards of its citizens.
▪ This growth is driven by factors such as investments, innovation, education, natural
resources, and stable governance.
▪ A growing economy yields higher incomes, more job opportunities, and a greater ability to
invest in public services and infrastructure.
Why is economic growth important?

i. Job creation: Economic growth is intrinsically linked to job creation. As businesses expand
and new ones emerge, they require a larger workforce to meet increased demand for their
products and services.
ii. Government revenue: Expanding economic activity results in higher government tax
revenues.
iii. Investment attraction: Growing economies tend to attract more investments, both domestic
and foreign. Businesses are more inclined to invest in expanding their operations when they
anticipate robust economic growth.
iv. Higher living standards: As an economy expands and generates more output, it increases
the nation's GDP. This, in turn, contributes to higher income levels for individuals and
households. Higher income levels enable people to afford a better quality of life, including
improved housing, healthcare, education, and access to goods and services.
Measuring economic growth

▪ It can be calculated using three approaches:

i. Production approach (value-added by industries

ii. The income approach

iii. Expenditure approach


Expenditure approach

▪ Expenditure approach (total spending on goods and services): summing all the
expenditures made by different sectors in the economy including households, businesses,
governments, and foreigners.
▪ The expenditure approach is the most widely used.
▪ GDP = C + I + G + NX
▪ Components of GDP using expenditure approach
C = Consumption
I = Investment
G = Government spending
NX = Net exports (Exports - Imports)
The income approach

The income approach (total income generated): summing all the incomes earned by the factors
of production including labor, capital, and land in the economy

GDP = Y = Wages + Profits + Rent + Interest


Where:
Y = National income
Wages = Income earned by workers
Profits = Income earned by businesses
Rent = Income earned by landlords
Interest = Income earned by lenders
What causes economic growth?

▪ Investment
▪ Innovation and technology
▪ Human capital
▪ Natural resources
▪ Political stability
▪ Trade
▪ Government policies
Business cycles

▪ business cycles are the recurring patterns of expansion and contraction in economic
activity.
▪ These cycles reflect the ever-changing nature of economies, driven by various factors and
exhibit four primary phases: expansion, peak, contraction, and trough.
a. Expansion - periods of growth and increased economic activity.
b. Peak - the highest point of the cycle, just before a downturn.
c. Contraction - a decline in economic activity leading to a recession.
d. Trough - the lowest point before the next expansion.
Business cycle
Q &A

Thank you

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