Economic Growth Chapter 19 IB Economics

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

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

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

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

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

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 1283033 2007 1311260 A? 2008 1318054 B? 2009 1285604 C? A = 1311260—1283033/1283033 = 2.2% B = 1318054-1311260/1311260 = 0.52% C = 1285604 – 1318054/1318054 = -2.46%