GROWTH

1. GROWTH DEFINITIONS “ The ability of an economy to satisfy consumer wants by producing more goods and services over a period of time”. “Economic growth is the long-run expansion of the economy’s ability to produce goods & services. “ Economic growth is an increase in the productive capacity of an economy, whether this capacity is fully used or not .” “The ability of a country’s economy to improve the standards of living of it’s inhabitants”

2. GROWTH The above mentioned definitions can be grouped under 3 different categories: 1] REAL INCOME:This includes the actual economic output i.e number of goods & services produced. 2] PRODUCTIVE CAPACITY: This is a measure of an economy’s actual potential. Rather than looking at the actual output of an economy, the potential of an economy is assessed. 3] NET SOCIAL WELFARE: The measure attempts to include the ‘quality of life factors’. This measure also includes non-economic factors in addition-eg: environment, entertainment, health etc. an example of one such measure is HDI (Human Development Index)

3. LABOUR PAYMENT FOR G & S REAL INCOME DEFINITION The two-sector circular flow model shows the definition of economic growth based on real income. INCOME HOUSEHOLD SECTOR FIRMS GOODS & SERVICES FROM THE ABOVE MODEL IT CAN BE SEEN THAT THE OUTPUT OF AN ECONOMY MUST EQUAL THE INCOME OF THE HOUSEHOLDS. THIS MEASURE IS KNOWN AS THE GDP ( Gross Domestic Product).

4. Measure of growth • A simple way of measuring growth is to use a measure called GROSS DOMESTIC PRODUCT (GDP). Some world organisations refer to it as GROSS NATIONAL PRODUCT (GNP). • It measures the valueof the output of all finalgoods and services in a year. • All countries adopt this method and thus is useful in comparing the value of output between countries and also within the same country over a period of time

5. NOMINAL GDP vs REAL GDP • Nominal GDP is the current money value of GDP in an economy. • It is calculated by multiplying the QUANTITY of goods & services produced (Q), by the current PRICE (P) of those goods & services. • Any increase in Quantity of G & S produced will increase GDP. • Any increase in Price will also increase GDP figures. Such increase cannot be considered growth. Only increase resulting from higher production with or without price increase is considered as “growth” • Thus an increase in NOMINAL GDP could mean that: 1] Production has increased but less than the GDP figure suggests. 2] Production has not increased at all, or 3] Production has decreased.

6. REAL GDP • We use the term ‘REAL’ when the statistics have been adjusted for PRICE increases (inflation). • To calculate REAL GDP, we multiply the QUANTITY of each good by the price of that good in a base year. • Thus, it ignores the changes in price level NOMINAL GDP = Q x Pc (Current Prices) REAL GDP = Q x Pb (Base year Price)

7. CALCULATIONS – REAL GDP Nominal GDP (Year x) Price Index in the base year X Real GDP (Year x) = Price Index (Year x) Real GDP X 100 Growth Rate = Previous Year Real GDP % Current Year – Previous Year X 100 = Previous Year

8. NOMINAL REAL YEAR GDP GDP 1990 1991 1992 5 8 5 4 1993 5 10 6 4 1994 6 11 7 5 1995 6 11 8 6 SIMPLE CALCULATION OF REAL GDP GOOD A GOOD B Q P($) Q P($) 4 5 5 3 35 35 4 7 6 3 46 38

9. Calculating Real GDP using CPI 1280 2.4% 1067 -16.7% 972 -8.9%

11. PRODUCTIVE CAPACITY