1. Economic Growth
Chapter 19 IB Economics

2. Economic Growth
This is probably the most important objective of government
It helps to achieve the other two that we have already discussed (low unemployment and low & stable inflation)
Growth is measured in real GDP
Remember that real means adjusted for inflation (inflation removed)
Nominal GDP includes inflation
Rates of growth will vary over time and from country to country
Emerging economies like China and India have seen rapid and volatile economic growth over the last 3 decades

3. Using diagrams to illustrate growth
It can be argued that demand side factors can bring about short term growth
We can show this with both the AD/AS diagram and the PPB
In the first diagram we can see that there is spare capacity or a deflationary gap (we could use a Keynsian diagram for this too)
There are resources that are not being used or used inefficiently as seen by point a inside the PPB
If AD is increased from AD1 to AD2 there is no more output gap
More resources are being used
We move from point a to b on the PPB
Notice that b is not on the PPB because it is not really possible to use all resources (natural unemployment)
Short term growth

4. Using diagrams to illustrate growth
These diagrams illustrate long term growth
This is created through supply side factors/policies
Remember that this is anything that improves the quantity or quality of factors of production
This kind of growth can avoid inflationary issues
We use the shift of the PPB as an alternative (or to complement) the shift of the LRAS
Long term growth

5. Consequences of economic growth
Remember that the word ‘consequences’ means both positive and ‘negative’
There are both positive and negative consequences of economic growth
Positive
Long term growth can lower inflation
An increase in national income means GDP per capita increases which should increase in material living standards
Growth can contribute to leaps in technology making life easier and more pleasurable
Higher income means higher taxes which, with redistribution, can lead to less inequality
Higher growth leads to more trade
More imports (more choice)
Increased productivity leads to higher levels of exports
As national income rises so does levels of education and human capital and with it demands for freedom and democracy – increases the moral fibre of a society

6. Consequences of economic growth
Negative
An increase in income does not necessarily lead to an increase in happiness
Higher income may come because leisure time has been sacrificed and personal relationships have been neglected
It might be that as people earn more they buy more and never satisfy their wants – the greater the material wants the less people are happy
As economies grow they move from primary to secondary to tertiary sectors which can lead to structural unemployment
This can lead to inequalities
There is also the effect on the environment and the negative externalities of production that arise from producing higher output
Producing higher output may lead to more depletion of non-renewable resources
Economic growth may come at the expense of sustainable development
The extent to which this may happen is diminished by the fact that more educated citizens will demand policies and develop technologies that will promote sustainability

7. HL bit
In paper 3 you may be asked to calculate the rate of economic growth from a set of data
The formula is
Growth rate = ((real GDP in year 2 – Real GDP in year 1) / Real GDP in year 1) x 100
(New – Old / Old) x 100
Work out the growth rates for these numbers
Year
Real GDP
2006
2007 A?
2008 B?
2009 C?
A = — / = 2.2%
B = / = 0.52%
C = – / = -2.46%