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Copyright © Kevin Bucknall, November 2001
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UNIT 3: MANAGING THE ECONOMY
6. ECONOMIC GROWTH
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What is economic growth and how is it measured?
The increase in output of the value of goods and services, usually compared with the yearbefore. Measured by the change in gross domestic product (GDP), after removing theeffect of price changes.
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Can see as movement of production function in an outward direction.
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Nominal and real economic growth
Nominal growth includes price changes and, with inflation, increases the measured rateof growth, thus exaggerating it.“Nominal rate of growth” = change in GDP over the year (e.g., 3%)“Real rate of growth” = GDP MINUS the rate of inflation (e.g., if inflation is 1.4%, realgrowth is 3-1.4 = 1.6%).
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Growth as an indicator of the standard of living
Growth is often seen as most desirable, especially by governments. Growth is one of the9 or 10 economic goals (remember!) and higher is often thought better, although there arecriticisms of high growth rates.But a high growth rate is limited, or misleading, as an indicator of improved livingstandards.Growth over time within one country: limitations as a measure. NB Also virtuallyidentical with problems in use of GDP per capita as a measure of standard of living.1. Excludes much that goes in standard of living – e.g., the environment (air or waterpollution, availability of parks and green space; unemployment numbers;2. The hours worked are not examined: if double hours worked and GDP rises by 5%, itlooks good with 5% “growth” but are actually worse off! Leisure excluded.3. Free services or goods are excluded: e.g., housewives or househusbands work;voluntary service like teaching computing for Age Concern; looking after a relative; freeexchange of labour in service Swap schemes e.g., babysitting.
 
Copyright © Kevin Bucknall, November 2001
 24. Change in GDP can be because of changes in aggregate demand – if demand falls inone year, growth can be negative – then if demand increases, growth bounces back strongly which can mislead. Need to measure “the underlaying rate of growth” tocompare over time. This is what the economy could produce if demand was enough tobuy all that was produced.5. Should be done on a per capita basis – if GDP increases 2% but population increases4%, people are definitely worse off on average.6. Environmental damage is excluded. Related problem is if damage environment thenspend £100 million putting it right, the GDP rises by £100 m. and on paper we are “betteroff” and have growth!7. Crime naturally excluded as not good – but if crime increases and we spend £100million on police to combat it, then the GDP rises by £100 m. and on paper we are “betteroff” and have growth!8. Income distribution could have got worse, as GDP per capital rises!Comparing growth between countries can mislead1. Slow growth can often conceal a better situation. E.g., UK 2.2% p.a., Egypt 3% p.a.but Egypt is much poorer.2. Large percentage of a small number is easier to achieve than lower % of a large one.3. Countries do not measure in identical ways, although should for proper comparisons.4. Countries quality of statistical accuracy varies – UK figures better than Cambodianones.5. Much more free family work done in poor developing countries than in richerdeveloped ones – so miss out much real production that is achieved in the poor countries.6. “Unofficial sector” or “Black economy” is not picked up in statistics, and differsbetween countries, e.g., black economy thought bigger in Italy than in Denmark.7. Exchange rate distorts picture e.g., if used to have US$1=10 francs and exchange ratechanges to $1=5 francs, measuring the GDP of France before and after looks like adoubling of GDP!Exchange rate also accounts for countries where people apparently live on $1 a day (aswell as missing output from GDP from family production, poor statistical accuracy etc.)
 
Copyright © Kevin Bucknall, November 2001
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What causes growth? = sources of growth
Useful to consider under the headings of Land, Labour, and Capital + Remainder
O = f (L, N, K) + R
(did earlier)A) Land factorsNatural resource endowments – if got diamonds or oil etc, it helps! But the land factor isnot enough.B) Labour factors1. Labour skills and abilities = education and training – the more the better for growth butof the right kind.2. Labour enthusiasm = motivation – the more the better for growth but not easy to knowhow to stimulate. War always seems to increase it!3. Labour numbers – the more the better if got skills etc and do not start with laboursurplus; less useful in China or India than in UK.4. Managers’ ability, training, and enthusiasm.C) Capital factors1. More machinery and equipment = good for growth.2. Higher rates of investment = = good for growth because means more machines etc.3. Higher rate of saving = good for growth because can invest more (in short term couldharm output if means consumers are suddenly not spending as much, but good for longterm).4. Technical progress = good for growth and is the MAIN source of growth in richdeveloped countries.
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Desirability of growth = the case for growth or the benefits of growth
1. Growth means can increase standard of living, increase GDP per head, spend more onwelfare, transport, education and health for e.g. Is the source of our present livingstandards, health levels, lack of illiteracy etc.
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