ECONOMICS

Economic Growth and development

Economic growth refers to growth of output in the economy over a period of time. The value of
output is usually measured as GDP, (the value of all the goods and services produced within the
country in a year). The total value of the output provides income for those who produce it, in
the form of wages, profit, interest and rent.

How is Economic Growth measured?

Economic growth causes an increase in real per capita GDP. Not only is output in the economy
increasing, but doing so at a faster rate than an increase in population.

The formula for economic growth is:

Economic growth in year 2 = Change in real per capita growth from yr. 2 to yr.1 x 100
Real per capita GDP in yr. 1
(New-old/old)

ASSUME: If in year 1 the GDP was $500 million and in year 2 it grew to $520 million, then it
would have grown by $20 mil or 4%.
$520 - $500 x 100 = .04
$500

(This assumes that there is no inflation, so if there was, the inflation rate would be deducted.)

ASSUME that inflation rate was 2% then the real GDP growth would be:

4% - 2% = 2% Economic Growth

ASSIGNMENT:

Calculate the economic growth in each of the following cases:

GDP ($ mil.) Economic growth rate %

In year 1 In year 2
100 103
200 202
300 312

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What is GDP per capita?
GDP per capita is GDP divided by the population. (This is also called GDP per head, because it is
the average output/income which each person in the country has.)

Real per capita GDP = Real GDP

Total Population

If GDP grows faster than the population, then GDP per capita will rise and you will have
economic growth.

It is a major role of the government to measure the value of the country’s output and calculates
the rate at which it has risen.

ASSIGNMENT:
Calculate GDP per capita in the following cases

GDP ($ Population GDP per capita

thousands.) (thousands.)
600 60
800 40
500 12.5
300 8.5

What are the causes of economic growth?

Resources known as the factors of production are needed in order to produce goods and
services. The quantity and quality of these factors are very important in affecting the rate of
economic growth. Some of these factors include:

a. Investment – spending on capital goods, such as premises, machinery

and equipment. More investment means that the economy has the
capacity to produce more goods and services in the future.

b. Changes in Technology – technical progress means that as the quality

of capital goods improves a given amount of capital can now produce
more output than before.

c. Larger skilled work force – the economy can produce more if it had
more workers. This would provide a nature increase in the working

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 population eg: more students graduating, or an increase in immigrant
workers.
d. Education & Training - this affects the quality of the work force. The
more educated, skilled and trained the workers are, the higher the
output of goods and services.

e. Natural Resources – if a country discovers or develop natural

resources, this can stimulate economic growth.

f. Government Policies - the government takes responsibility for

managing the economy. The effectiveness of the policies that they set
can have a significant impact on the country’s economic growth rate.

Evaluating the causes of economic growth

This would mean trying to judge which of the above factors of production are the most
important. For example, the discovery of oil in the middle east, and the large amount of capital
investment made by China has played significant roles in the growth of these countries.

It must be noted that increasing the economy’s capacity to produce more may not necessarily
lead to a rise in real GDP unless the demand for its goods and services are also rising.

Benefits of Economic Growth

Economic growth is a major objective of government policy. This implies that it must have
benefits which outweigh any cost.

 A rise in material standards » If GDP rises at a faster rate than the population, the GDP
per capita rises. This means that the population becomes
materially better off. (Better homes, cars, flat screen TV.)

 A rise in the welfare of the population » As the capacity of the economy to produce
more increases, the government is able to devote more
resources to services such as health care, education,
and can improve the general welfare of the country.
Economic growth can also mean a reduction in infant
mortality rate, increase in life expectancy and a greater
literacy rate.

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  A rise in employment and fall in unemployment » As output rises, more workers will be
required to produce them causing unemployment to fall.

 A reduction in poverty » As output rises, the government is able to collect more taxes
from the higher income group. This increase in government
revenue will raise the standard of those in the lower income
group by providing more benefits.

Cost of Economic Growth

 Environmental Cost » Greater output can lead to air, land, sea and noise pollution.
 Congestion » Economic growth is often concentrated in certain urban areas which can
become congested and overcrowded.
 Loss of renewable resources » Economic growth uses natural resources such as oil,
which cannot be replaced.
 Lower quality of life » Growth can make a country better off, but as life styles change
and people move from the countryside into the city, life may
become more stressful.
 Inequalities of income and wealth » The benefits of growth are unevenly spread. This
means that some people become better off while others are
left behind. The gap between rich and poor becomes wider.
 Inflation » Sometimes the rate of economic growth is too fast for the economy to
respond to without a rise in the general price level.
Trade Cycle
Economic growth does not proceed along a smooth upward path, but has a series of
“booms” and “slumps”. In some years output rises very quickly, and at other times very
slowly, or even falling off. On an average, it takes roughly 5 years to move from a slump
to a boom. Below is such a “Trade Cycle”.
GDP
Boom Recovery
Trend

Recession

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 Slump
Time in years
A recession is a period in the life of a country when GDP is falling and so is
employment. If this recession goes unchecked it becomes a Depression.

The consequences of economic growth

Economic growth can more readily be seen in poorer countries than in wealthier ones.
The problems of economic growth in such countries include obesity, pollution and other
environmental cost.

ECONOMIC DEVELOPMENT

Economic Development is the creation of wealth from which a country, region,

community or individual can benefit. It includes features that will enhances the
economic and social conditions, (quality of life) of its residents.

The average standard of living in developing or third world countries are generally very
low, with the most striking features in the amount of income and the GDP per head.

The richer developed countries include Europe, North America, Japan and China, while
lesser developed countries can be found in Asia, Africa and South/Central America.
These countries generally have a large percentage of their population living below the
poverty level.

GDP only measures the output which goes through the market. In many developing
counties, the people live subsistence lives, therefore the GDP per head under estimate
the country’s real income.

Major problems facing developing countries (3rd world)

 Low agricultural productivity
 Poor natural resources
 A shortage of capital
 Large scale unemployment
 A low productivity labor force
 Large population growth
 Social barriers

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Aid to developing countries include: Humanitarian & Economic motives, Gifts of food
and medicine, Loans/grants, Technical assistance, Education and training and Foreign
Investment.

Growth is measured by changes in GDP, which reflects general increases in total net
output. “Negative growth” means that the country is not doing as well as in the previous
year. “Zero growth” indicates that there has been no changes when compared to
previous years.

Classwork
1. What is the difference between economic growth and economic development? (4)

2. How does Negative economic growth differ from Zero Economic growth? (2)

3. Briefly explain the following, giving an example of a country that fits that category.
i) Underdeveloped country
ii) Developing country
iii) Highly developed country (6)

4. Why is education an important part of economic growth and development? (2)

5. In one year a country’s GNP was $1000 mil. And population was 500,000. A few years
later, GNP rose to $1500 mil. And population grew to 600,000.

i) What changes has taken place in the country’s real GNP? (3)

ii) What has happened to the average standard of living in the

country? (2)

6. Is it true to say that an increase in population leads to an increase in economic

growth? Explain. (2)

Homework
1. Investment is good for economic growth. Is foreign of local investment best for the
country? Explain. (2)
2. How can the oil which is produced in the middle east (OPEC), affect the economic
growth of the Bahamas? (2)

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3. Is it possible to have economic growth with little to no economic development/ (2)
4. Draw and explain the “Trade Cycle” graph. (3)
5. There is a cost associated with economic growth. Give 3 possible solutions that the
government can use to reduce this. (3)
6. What would have to happen within a country for a 3rd world underdeveloped
country like Haiti to move up the ranks to a developing country? (2)