5.

Economic Growth
Definition
Economic growth is measured by the percentage change in real gross
domestic product (Real GDP) each year. Economic growth means that there
is an increase in the amount of goods and services available for society. The
value of goods and services that a household consumes each year is called
their standard of living. Economic growth increases the standard of living
for all households in the community. or this reason economic growth is the
principal macroeconomic ob!ective and the best indicator of an economy"s
performance. Economic growth may mean improved medical technology#
improvements in the nutritional content of food# better infrastructure#
improved housing or better entertainment. $ome of the benefits of growth
may be longer and more meaningful lives with less sic%ness or disease.
The real GDP of a country may increase significantly but the country"s
population may also be increasing rapidly. This will mean that individual
households may be not better off because the increased production has to be
shared between more people. & second measure of economic growth is
called per capita GDP. This means to divide the GDP of a country by its
population. 'ncreases in per capita GDP are a good indication of economic
growth. &s a result of the relationship between output and income changes in
(ational 'ncome or per capita income also indicate economic growth.
Calculating Economic Growth
Economic growth can be measured by comparing changes in GDP from the
previous year.
Economic Growth ) Real GDP (*urrent +ear) , Real GDP (Previous +ear)
Real GDP (Previous +ear)
Per capita GDP is measured by dividing the Real GDP by the population.
Per Capita GDP = Real GDP / Population
Real GDP is calculated by ad!usting money GDP or the numerical value of
GDP for increases in inflation.
Real GDP = Money GDP / Price Inde !""
-
'nde. numbers are statistics converted to a number out of -// so as to ma%e
percentage change calculations easy. 'nde. number can be used to show
changes in GDP# prices# wages and many other economic variables. 0se the
following formula to calculate percentage changes using inde. numbers.
# $ = Current Inde % Pre&iou' Inde
Pre&iou' Inde
Growth &er'u' De&elopment
Economic growth measures changes in the material well being of society
and standard of living. 1hilst this is important it is not the only measure of
economic progress. Economic development is a broader term and indicates a
wider range of improvements to society. Economic development is measured
by increases in the welfare of the population. Economists refer to the term
2uality of life to indicate these broader measures. 3uality of life might
include hours of wor%# health# leisure activities and the 2uality of the
physical environment.
Development does re2uire economic growth# but it also re2uires that such
growth is directed to the welfare of the population rather than for the benefit
of a few. Development could be indicated by reductions in infant mortality
rates# lower death rates# longer life e.pectancy# less poverty and more
e2uality. 'mprovements to infrastructure li%e good sanitation# safe drin%ing
water# better roads# ade2uate communications# effective education# and
better medical care are also good indications of economic development.
The 0nited (ations measures economic development with the 4uman
Development 'nde. (4D'). The 4D' is a score between / for nations with no
human development and - for the ma.imum possible human development.
*ountries are ran%ed by their 4D'. 'n 5//6 the 4uman Development Report
gave (orway the highest score with /.788 and $ierra 9eone the lowest at
/.5:;. &ustralia ran%s fourth after (orway# 'celand and $weden with an 4D'
of /.767. *hina has an overall 4D' of /.:5- and is ran%ed -/8
th
.
Mea'uring GDP
'n the circular flow of income we identified the three methods of calculating
GDP. The value of production can also be calculated by the value added
method which involves counting up the number of new products and
services produced and multiplying each by their mar%et price to calculate a
value of total production. 't is important to only measure the value added by
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subtracting the value of inputs. 't would be double counting to include the
value of tyres produced and the value of a new car which included new
tyres. The incomes received method. 'f a person receives a factor income
then factors of production must have been provided or wor% done. Thus
incomes received are a measure of the amount of wor% done in an economy.
'f a wor%er underta%es overtime their income will increase. inally income
and production can be calculated by the e.penditure method. 'f consumers
have spent money on a good or a service then it must have been produced.
*onsumer spending is also an indicator of income because consumers have
to have income to be able to spend.
(ource' of Economic Growth
Economic growth can be achieved if the productive capacity of the economy
is e.panded. This could be achieved by e.panding the factors of production
in the economy. &n active immigration policy that e.panded the wor%force
would increase the rate of economic growth. 'nvestment in capital goods
resulting in capital widening and deepening would increase the productive
capacity of the economy. 'ncreases in the productivity of resources would
result in increased output and economic growth. This could be achieved by
the introduction of new technology and improvements to the production
process.
)he Effect' of Economic Growth
*i&ing (tandard'
The term standard of living is defined as the value of goods and services
consumed by households. 'f the economy has a larger GDP then there will
be more goods and services for consumers to buy. & larger GDP will also
mean more output and more resources used which will generate more
incomes. 4igher (ational 'ncome will mean that households have more
money to spend on goods and services. *onsumers will have better housing
and clothing and will have more money for food and medicine. *onsumers
will visit the doctor more fre2uently and have better health as well as being
able to spend more on education.
4igher incomes will mean higher ta. revenue to the government. This will
enable the community to have better infrastructure and collective goods.
<etter roads# hospitals and schools will be some of the more obvious gains
from economic growth. Economic growth is often associated with
improvements in life e.pectancy and 2uality of life.
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Employment Growth
'ncreased output re2uires more resources. 4igh rates of economic growth
often coincide with strong employment growth and lower rates of
unemployment. Economic growth may also change the nature of !obs
available and create better and higher paying !obs. &s national income
increases consumers demand more sophisticated goods and this provides an
opportunity for more value added industries to grow. These new industries
provide better employment opportunities. or e.ample rapid growth in
*hina has stimulated the *hinese car industry and created many !obs in car
construction.
Inflation
'nflation is defined as a sustained increase in the general level of prices.
Periods of strong economic growth eventually create inflation because
factors of production start to become scarce and producers have to increase
factor prices to attract sufficient resources to maintain economic growth. or
e.ample it is not uncommon for money wages to increase during periods of
labour shortages. 4igher wages will increase costs and this will lead to
further price increases.
Income Di'tri+ution
Economic growth will provide increased employment opportunities for the
unemployed. This should improve income ine2uality by removing many
people from social security benefits.
4owever economic growth may worsen the distribution of income for
several reasons. irstly the benefits of economic growth may not flow to all
the members of society. $ome will benefit more than others= Economic
growth will increase the incomes for those in demand and may result in
overtime payments and bonuses. <usiness people and the self employed may
benefit from increased sales due to rising demand for their products. >thers
however may be in industries that are not gaining the benefits of growth.
9ower income earners in poorly paid or in unprofitable industries will not
gain much benefit from economic growth. Economic growth is more li%ely
to sharpen the distinction between rich and poor and increase income
ine2uality.
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En&ironmental Impact'
4igh rates of economic growth can be detrimental to the environment.
4igher growth rates are usually associated with increased resource use and
this can result in the depletion of non renewable resources. or e.ample oil
depletion is accelerating as a result of the rapid industriali?ation of large
economies li%e *hina and 'ndia.
'n addition# increased output will create increased social costs and pollution.
Rapid industriali?ation in many nations has been associated with increased
air and water pollution. Environmental issues are becoming more important
and there is a growing recognition that rapid growth at the e.pense of the
environment may be detrimental to our 2uality of life.
International Compari'on'
*ountries are compared according to their per capita incomes# per capita
GDP and 4uman Development 'nde.. The differences observed in such
comparisons can be e.plained by the economic history of the countries
as well as their overall classification. The countries of the world can be
classified into four groups.
-. De&eloped Countrie' or ,d&anced Indu'triali'ed Economie' (&'Es).
These countries are the most affluent and technologically advanced
economies. &'Es en!oy high living standards# use state of the art
technology# have e.cellent infrastructure and offer their citi?ens the best
2uality of life. &ll of these countries have a long history of development.
@any of these countries industrialised in the industrial revolution and
have been advanced technologically since that time. $ome of these
countries were settled by advanced nations and received technology
transfer. &ll the &'Es have high per capita incomes and ran% highly on
the 4uman Development 'nde.. They include countries li%e the G6 )
0$&# Aapan B Germany. G; C rance# 'taly. G: C 0D# *anada. &ustralia
is also considered to be an advanced industrialised economy. &ustralia
was ran%ed 8
th
in the 5//6 4uman Development Ran%ings and had a per
capita income of E5;#6:/ 0$D in that year.
5. -ewly Indu'triali'ed Economie' (('Es). $everal countries in southFeast
&sia have been able to industrialise rapidly in the last few decades. This
resulted in rapid economic growth and large increases per capita incomes.
@ost of the high growth in the ('Es was achieved by getting the basics
right. $ignificant increases in e.penditure on human capital and private
;
domestic investment largely powered the growth. 4igh domestic savings
levels meant investment levels remained high. &griculture e.perienced
rapid growth and improvement of its productivity. ('Es population
growth rate declined faster than in other parts of the developing world.
('Es were also helped by their labour force being betterFeducated and
having more effective public administration than other developing
regions. Education policies concentrated on primary and secondary
schools to create a labour force with better s%ills. 'ncomes policies %ept
the cost of these s%ills low which placed many businesses at a cost
advantage. &nother cause of this success was the development policy
used. The policies were made to create a stable framewor% for private
investment while increasing the integrity of the ban%ing system and
raising levels of financial savings. Policies on agriculture pushed
productivity without pushing the rural economy. E.ternal policy focused
on e.ports with the result that a large percentage of GDP is e.ported.
oreign investment was encouraged with generous ta.ation policies and
government assistance and technology transfer was achieved. E.amples
of ('Es include $outh Dorea# $ingapore# Taiwan# *hina# (the Gour
TigersH) and the newly industrialised economies of southFeast &sia#
'ndonesia# @alaysia# and Thailand. 'n the 5//6 4uman Development
'nde. ran%ings @alaysia ran%ed ;I
th
# *hina ran%ed -/8
th
and 'ndonesia
ran%ed --5
th
. 'n 5//6 the per capita income of these countries wasJ
@alaysia EI#:;/ 0$D# *hina E8#/5/ 0$D# and 'ndonesia E5#78/ 0$D.
6. *e'' De&eloped Countrie' (9D*s). @any of the countries of the world
fall into the category of developing countries. These countries have low
per capita incomes and widespread poverty. 9D*s often rely on a narrow
range of commodity e.ports# the prices of which fluctuate widely. 9D*s
often lac% a good education system and many people are illiterate. $uch
wor%ers are only able to perform the most basic of tas%s. $uch tas%s earn
little income. Population pressures are more severe in the developing
world. $uch pressures place greater demands on the country"s resources
and tend to ma%e the problem of poverty worse. 9D*s have subsistence
and barter based industries that are centered on village type relationships
and this hinders the development of commercially viable industries.
9D*s have little access to savings and this hinders capital formation and
technological progress. Production methods used in agriculture and
industry remain primitive. 'nfrastructure remains very poor with little
access to education or health care and little chance of attracting foreign
investment because of poor transport and communications. These
K
countries are said to be trapped in a vicious cycle of poverty. @ost of the
countries in &frica# $outh &merica and *entral &merica are in this
category. (igeria had a per capita income of EI;/ 0$D in 5//6 and was
ran%ed -;5
nd
on the 4uman Development 'nde.. &ngola had a per capita
income of E;// 0$D in 5//- and an average life e.pectancy of 67 years
for men and 8- years for women.
8. Economie' in )ran'ition. @any of the countries in Eastern Europe are
trying to transform their economies and become more integrated with
1estern Europe. These countries were socialist which slowed their
development compared to the more mar%et based economies of 1estern
Europe. 'mportant reforms in many of these countries have included the
privitisation of $tate enterprises# the introduction of free mar%et business
laws# trade and financial mar%et liberalisation# and shifts towards western
style economic and political institutions. $ome economies in this
category have made success transitions and have achieved rapid growth.
4ungry# Poland and the *?ech Republic are good e.amples. >ther
economies have e.perienced economic decline as a result of the
transition. Georgia# @oldova and Ta!i%istan have yet to benefit from the
transformation of the $oviet 0nion.
Re'earch
ind the details for your own country on the 'nternet by searching for
country profile or visiting the <<* (ews web site (news.bbc.co.u%) and
searching by country or region.
)he .orld (corecard / 0uality of *ife Indicator'
>f the world"s K billion people 5.I billion live on less than E5 0$ per day
-.5 billion people live on less than E- 0$ per day.
@ore than a billion people do not have a safe water supply.
5.8 billion people lac% ade2uate sanitation.
6/#/// children die each day as a result of poverty and malnutrition.
9ife e.pectancy in developing countries has increased from ;; to K;
years from -7:/ to -77I but remains well below that in &'Es.
The infant mortality rate has declined from --/ per -/// births in -7:/ to
K8 per -/// births in -77I.
The percentage of children suffering malnutrition in developing countries
has fallen from 6:L to 5:L between -7I/ B -777.
$chool enrolment increased from ;/L in -7:/ to :5L in -777.
:
<etween -7:/ B -777 the percentage of people with access to safe
drin%ing water in rural areas of the developing countries rose from -6L
to :-L
Three million people die from 4'M &ids each year and only -/L of those
who are infected have access to effective drugs for treatment. 'nfection
rates are accelerating in many poor countries.
Conclu'ion
Economic growth and development continues to be of great urgency for
many regions of the world and growth remains the principal macroeconomic
ob!ective of any government. Economic growth brings the benefits of a
higher standard of living# improved career opportunities and a better 2uality
of life. Governments need to ensure that economic growth is sustainable and
that the costs of economic growth don"t outweigh the benefits.
E.am 3uestions
@ultiple *hoice 3uestions
-. &ustralia is an e.ample of anJ
a) &'E
b) ('E
c) 0nderdeveloped country.
d) Economy in transition.
5. @easuring GDP by counting up the value of goods sold is an e.ample of
theJ
a) Malue added method.
b) 'ncomes received method.
c) E.penditure method.
d) Double counting.
6. 3uality of life is a better indicator of human welfare because itJ
a) @easure changes in personal income.
b) @easures changes in per capita incomes between countries.
c) *onsiders nonFfinancial factors.
d) avors poor countries.
I
$hort &nswer
-. Define the following termsJ Per capita income# standard of living#
2uality of life# 4uman Development 'nde..
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5. 4ow is economic growth calculatedO
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6. 1hat is the difference between growth and developmentO
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NNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
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E.tended Response
.hat are the co't' and +enefit' of economic growth1
Rule -J Define the terms in the 2uestionJ Economic growth.
Rule 5J 'dentify B define related conceptsJ 9iving standards# employment#
inflation# environmental damage# resource depletion.
Rule 6J 9in% introduced terms to the 2uestionJ &s the rate of economic
growth accelerates so to will the rate of resource depletion.
Rule :J 0se e.amples to communicate additional meaningJ >il reserves have
been seriously depleted as a result of the rapid industriali?ation of 'ndia and
*hina.
Rule 8J Draw logical conclusionsJ *hanges in the rate of economic growth
can have either positive or negative effects on the economy.
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