S17

IGCSE®/O Level Economics

6.3 Output and growth

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 Measuring economic activity
Resources are used to produce goods and services. But how can we measure how the
total output of goods and services grows or changes over time?

national output = national income = national expenditure

We can therefore measure total output in three ways because the value of output is also
equal to the total amount spent on purchasing it, which in turn is used to pay for the
resources used to produce it, i.e. factor incomes including wages and any profits

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 Gross domestic product
The total value of output produced in an economy is its gross domestic product (GDP)

As prices rise the total value of output or nominal GDP will also rise, but there may
be no actual increase in the volume of goods and services produced
If the volume of goods and services expands, then the real GDP will have increased

Year 1 Year 2 Year 1 Year 2

GDP = $100bn GDP = $110bn GDP = $100bn GDP = $110bn

Inflation was only

But inflation was 3% so there has
10% so there has been a 7% increase
been no change in in real GDP
real GDP

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 Economic growth
…is measured by the rate of increase in real GDP each period (i.e. the
change in nominal GDP adjusted for price inflation over the same period)

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 Achieving long-term growth
Long-term growth in an economy is achieved
by expanding its productive potential:
•the discovery of more natural resources
•investment in new capital goods and
infrastructure
•technical progress, including the discovery of
new man-made materials and more efficient
equipment, processes and products
•increasing the amount and quality of labour
through more and better health care, education
and training
•a more efficient allocation of resources

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 Growth cycles
All countries experience cyclical fluctuations in their rate of economic growth over time

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 The economic cycle
▼ The economic cycle
Economic recovery: real GDP grows faster
than normal. Demand for goods and services
rises rapidly. Firms increase output and hire
more workers. Profits and other incomes rise

Economic boom: demand for goods and Economic recession: real GDP falls.
services rises faster than output can rise. Demand for goods and services falls. Firms
Profits peak and prices rise as economy cut their production and lay off workers.
‘overheats’ Profits and other incomes fall
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 Short-lived, long-lived or double-dip
recession?

▲ A U-shaped economic recession ▲ A V-shaped economic recession ▲ A double-dip recession

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 Economic growth or economic welfare?
The benefits of economic growth are:
more goods and services, more wants satisfied
increased employment opportunities and incomes
increased sales, profits and business opportunities
low price inflation if output growth keeps pace with demand
increasing tax revenues for a government to improve public services
and public infrastructure
improved living standards
Possible problems with growth are:
xtechnical progress may replace labour with machines
xscarce resources are used up at a faster rate
xincreasing pollution and damage to natural environment
▲ Progress at any price? xpeople are not necessarily better off if growth is achieved, for example
by producing more weapons, cigarettes, coal-fired power stations or
even more cars, televisions and computer games
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 Measuring economic welfare
Simply measuring and monitoring the rate at which real output grows over time reveals
very little about how standards of living are changing, if growth is sustainable, and
whether economic welfare is improving.
Here are two possible measures of living standards:

Real GDP per capita Human Development Index (HDI)

A measure of the average income per person. If A wider measure that includes:
real GDP grows but the population increases at a
•real GDP per capita (adjusted for
faster rate then average income per head will fall.
differences in exchange rates between
countries)
But it takes no account of:
•level of education (how many years on
•how income is distributed (a few very rich people average a person aged 25 will have spent
can skew the average upwards) in education and how many years a young
child entering school now can be expected
•what people can buy (the availability of goods
to spend in education during his or her life)
and services may be poor)
•access to health care and having a
•the quality of and access to education, health
healthy lifestyle (measured by life
care, clean water and sanitation
expectancy)
•the impact of growth on the natural environment
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 There are wide disparities in human and
economic development

Source: UNDP

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