Economic Growth (HL IB ESS OLD COURSE - IGNORE)

Economic Growth

• Economic growth refers to the increase in the total market value of goods and services produced within a country over a given time period

  • It is usually measured annually as the percentage change in gross domestic product (GDP)

Gross domestic product (GDP)

• GDP is the monetary value of all goods and services produced within a country's borders over a given time period (usually a year)

  • It acts as an important indicator of a country's economic performance and productivity

  • For example, in 2021, the UK's GDP grew by 7.5%, showing an increase in economic activity despite challenges of the pandemic

• It can be measured using the following approaches:

  • The expenditure approach: adds up the value of all the expenditure in the economy

    • This includes consumption, government spending, investment by businesses and net exports (exports - imports)

  • The income approach: adds up the value of all the income or "rewards" for the economy

    • Wages from labour, rent from land, interest from capital and profit from entrepreneurship

• Both approaches should provide the same overall figure for GDP, as one group's expenditure is another group's income

Per capita GDP

• Per capita GDP = GDP ÷ the population

• This means that per capita GDP measures the average income per person in a country

• It provides a more accurate assessment of living standards and makes it easier to compare standards of living between countries 

  • For example, Switzerland has a much higher per capita GDP than Burundi 

• However, it does not take into account inequalities in the actual distribution of income among the population

  • For example, whilst the UK has a relatively high per capita GDP, income inequality remains a significant issue, with some regions experiencing lower standards of living (and lower per capita GDP) compared to others

Measurement of economic growth

• Economic growth is commonly measured through the year-on-year percentage change in GDP and per capita GDP

  • It indicates the overall health and expansion of a country's economy

  • A country experiencing sustained economic growth may see improvements in employment rates, infrastructure development, and living standards over time

• The rate of GDP growth (year on year) refers to the percentage change in a country's gross domestic product from one year to the next

  • This measurement shows the pace at which an economy is expanding or contracting over time

  • Positive rates of GDP growth indicate economic expansion, while negative rates signify economic contraction

  • For example, if a country's GDP grew by 2% in 2023 compared to the previous year, it indicates a positive rate of GDP growth for that period

Linear economy and environmental impact

• Economic growth is influenced by the interaction between supply and demand and is often seen as a measure of prosperity

• This more traditional approach to economic growth follows a linear model

  • This means that businesses, industries or whole countries mainly focus on increasing production and consumption without considering the environmental consequences

  • This linear economy model tends to overlook issues such as waste, pollution, and environmental degradation

Circular flow model

• The circular flow model is a simplified representation of the flow of goods, services, and money between households and firms (businesses) within an economy

  • It illustrates how households provide factors of production (such as labour and capital) to businesses in exchange for income, which is then used to purchase goods and services produced by businesses

  • In turn, businesses use revenue from selling goods and services to pay for factors of production and generate profits, completing the circular flow of economic activity

  • This model helps to demonstrate the interconnectedness and flow of resources and money within an economy

• Economic growth affects different parts of the circular flow model for society and the environment

  • These impacts, known as externalities, can be both positive and negative but often tend to be negative

  • A negative externality, such as pollution, arises when the cost of production or consumption is not fully covered by the producer or consumer but is instead passed on to society or the environment

  • Externalities are also referred to as third-party effects or spill over effects and occur due to market failures or misallocation of resources