Economic Growth
Students should be able to:
Define Economic Growth
Differentiate between nominal GDP and Real GDP
Causes of Economic Growth
Benefits of economic growth
Drawbacks of economic growth
Define Recession
Economic Growth
Economic growth is an
increase in the amount of
goods and services produced
( REAL GDP) per head over a
period of time usually a year.
GDP per capita/head
GDP per head/capita: this measures
the average output/ income per
person in an economy. Since this
takes into account the population, it
provides a good measure of the
living standards of an economy.
GDP per capita = GDP / Population
Nominal GDP vs Real GDP
Nominal GDP: the value of output produced in an
economy in a period of time, measured at their
current market prices is the nominal GDP.
Real GDP: the value of output produced in an
economy in a period of time, measured assuming the
prices are unchanged over time. This GDP, in constant
prices, provides a measure of the real output of a
country.
An increase in real GDP over time indicates
economic growth
Nominal GDP vs Real GDP
Nominal GDP
2019: 1 Million bottles of water at 50 naira each = 50 million naira
2020: 1 Million bottles of water at 100 naira each = 100 million naira
Increase in price (Price inflation) can increase GDP
Real GDP (constant prices)
2019: 1 Million bottles of water at 50 naira each = 50 million naira
2020: 2 Million bottles of water at 50 naira each = 100 million naira
Increase in Output can increase GDP (Economists are interested in this)
Causes of Economic Growth
Discovery of more natural resources
Investment in new capital and infrastructure
Technical progress
Increasing the quantity and quality of factors of production
Benefits of economic growth
Greater availability of goods and services
Increased employment
Improved living standards
Increased sales, profits
Investment in capital goods
Low and stable inflation: When output matches demand
Increased tax revenue for government
Drawbacks of economic growth
Unemployment (structural) leading to poverty
Pollution
Natural resources may get depleted
Increased negative externalities such as
pollution, deforestation, health problems etc.
May cause inflation if aggregate demand
outstrips output
Widening income inequalities in developing
countries
Recession
Recession is the phase where there
is negative economic growth, that is
real GDP is falling.
The standard macroeconomic
definition of a recession is two
consecutive quarters of negative
GDP growth.
Recession
Causes of Recession
Financial crises: if banks have a shortage of liquidity, they reduce
lending and this reduces investment.
Rise in interest rates
Contractionary fiscal policy: when government cuts spending,
demand falls.
Fall in real wages: usually caused when wages do not increase in
line with inflation leading to falling incomes and demand.
Fall in business confidence: reduces both supply and demand.
Black swan events: black swan events are unexpected events
that are very hard to predict. For example, COVID-19 pandemic in
2020 which disrupted travel, supply chains and normal business
activity, as well consumer demand, has caused recessions in
many countries.
Effects of Recession
Firms go out of business
Unemployment
Fall in income
Rise in poverty
Rise in inequality
Higher budget deficit: due to falling consumption and incomes, the
government will see a fall in tax revenue, causing a budget deficit to
grow.
Fall in asset prices (e.g. fall in house prices/stock market): recessions
trigger a crash in the stock markets and other asset markets as
investors’ and consumers’ confidence in the well-being fall of the
economy during a recession. The shares owned by investors will be
worth less.
Devaluation of the exchange rate.
