<4.6 ECONOMIC GROWTH> 

• ECONOMIC GROWTH refers to an INCREASE IN THE PRODUCTION OF ECONOMIC GOODS AND SERVICES compared from one period of time to another and is TRADITIONALLY measured in terms of GROSS NATIONAL PRODUCT (GNP) or GROSS DOMESTIC PRODUCT (GDP).

• GDP is the total value of all final goods and services produced within a country ('Domestically') over a time period (usually a year), REGARDLESS OF WHO OWNS the factors of production. 

• It is mainly measured by calculating the LEVEL OF SPENDING / EXPENDITURE by:

  • • • CONSUMERS (C)

      • FIRMS (I)

      • GOVERNMENT (G), and...

      • ...FOREIGNERS on EXPORTS (X)

• REAL GDP PER CAPITA, refers to the value of all final goods and services, at CONSTANT PRICES. divided by the POPULATION. 

"What would happen to your school if all of a sudden the income of your parents fell, or they started to worry about the future economic status?", Think in terms of the economic objectives, unemployment, eco-growth, equality, etc...

"When you studied microeconomics, you learned that there are two reasons why quantity would fall. What were they?"

"When consumers stop spending, what is likely to happen?"

"Would you hire more or fewer people?"

"Would you decide to invest and expand, or not?"

"Will income and the standard of living rise/fall?"

"Will the government have more/less tax revenue?"

"Will welfare spending rise or fall?"

"Will general prices rise or fall?"

• With lower output, UNEMPLOYMENT is likely to RISE.

• With less disposable income, CONSUMER SPENDING will inevitably FALL.

• The reduction in output and incomes will be expected to LOWER LIVING STANDARDS. 

• INVESTMENT SPENDING, both DOMESTIC and FDI, is likely to be DISCOURAGED as PROFITABILITY is now UNCERTAIN. 

• TAX REVENUE will DECLINE while GOVERNMENT SPENDING ON BENEFITS RISE which will NEGATIVELY IMPACT THE BUDGET (increase any budget deficit or reduce any budget surplus).

• The effect on the GENERAL PRICE LEVEL will depend on whether the recession has been caused by a DECREASE IN AD (Causing it to FALL) or a DECREASE IN AS (Causing it to RISE). 

• Sketch both diagrams and annotate, showing the consequences in terms of INFLATIONARY PRESSURE, UNEMPLOYMENT, and REAL GDP.  

 "DO NOW!!!!" 

"Imagine your school suddenly doubles its income (grows). They upgraded classrooms, bought new laptops and raised teacher salaries. But to earn that extra money, teachers are now overworked, more students cram into classes, and the school uses far more electricity, paper and fuel. So even though the school looks richer, it’s also more stressed and polluted." "Can you apply this scenario to an entire economy?, What are the postives of having better infrastructure?", What will likely happen to the environment?

"Can you think of a link between fiscal spending and supply-side policies? What type of government spending will not only increase economic activity in the short run but also lead to an increase in the production potential (economic growth) of the economy in the long run? win-win!!!"

"How can 'fiscal policy' promote growth?"

• EXPANSIONARY FISCAL POLICY, with LOWER TAXES to promote both consumer and business spending, and INCREASED GOV'T SPENDING, should increase business activity and lead to increases in investment spending, shifting the PPC outwards.

• In addition, government SPENDING ON GOODS SUCH AS INFRASTRUCTURE, HEALTHCARE, AND EDUCATION will result in the production potential of the economy growing.

• ⚠️"Do you think lower taxes will always encourage people to spend more of their money?" "What if they are pessimistic about the economy and their job security is low?" , "Why do you think government spending is more appropriate for a deep recessions?"

"How can 'monetary policy' promote growth?"

• EXPANSIONARY MONETARY POLICY, with LOWER INTEREST RATES, encourages households and firms to borrow more money, which they will spend in the economy, which should increase business activity and lead to increases in GDP and economic growth, shifting the PPC outwards.

• ⚠️"Do you think lower interest rates will always encourage people and businesses to borrow and spend?" "What if they are pessimistic about the economy? Is it really a good time to get further in debt?", "Why do you think government spending is more appropriate for a deep recssions?"

"How can 'supply-side policy' promote growth?"

• The primary aim of supply-side policies is to increase the production possibilities of the economy, hence nearly all these policies help to promote economic growth, in that they all attempt to INCREASE both the QUANTITY and QUALITY of the existing FACTOR ENDOWMENTS of an economy. These policies should increase the output and productivity of the economy leading to increases in GDP and economic growth, shifting the PPC outwards.

• ⚠️"Do you think this can have an impact in the short-term?", "Where will all the spending come from? "Must it be borrowed?", "If so, what about the debt repayments?", "What if we spend it on the wrong industries?", "Will tax cuts always encourage firms to invest in a deep recession?"