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Economic growth

Learn about economic growth and business cycles, including GNP vs. GDP, measures of growth, trend rates, determinants of growth, and costs and benefits. Understand the fluctuation pattern in economies over time. Reading: Unit 26 - Economic growth.

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Economic growth

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  1. Economic growth Learning outcome V • Define economic growth • Explain the difference between GNP and GDP • Describe the measures used to indicate economic growth • Explain the business cycle • Explain the trend rate and the output gap • Explain the determinants of economic growth • Evaluate the costs and benefits of economic growth Reading: Unit 26

  2. Economic growth The change in potential output of an economy measured by the change in real national income

  3. Growth in potential output II Economic growth Q of Investment goods I O Quantity of consumption goods

  4. Economic growth • Economic growth is measured in terms of national income • National income can be measured by GDP, GNP, GVA and Net national income at market prices (see p165) • The two most common measurements are GDP and GNP

  5. GDP & GNP • GDP stands for Gross Domestic Product • GNP stands for Gross National Product • The difference is that GNP includes income earned abroad on investments and assets minus income earned by foreigners on their investment and assets in the UK

  6. Economic growth • Economic growth doesn’t usually follow a stable pattern instead there are times of quick growth followed by slower (or negative) growth rates • These periods are often called booms and recessions • In almost all cases over time an economy will grow, this is shown by the trend line • The trend line approximates the growth in GDP

  7. Economic growth over time Trend output National output Actual output O Time

  8. Economic growth • It can be seen that at times the economic growth is above the trend line and at times below the trend line • When growth is above the trend line it is known as a positive output gap • When growth is below the trend line it is known as a negative output gap • The fluctuations around the trend line are known as the business cycle (sometimes called the economic cycle)

  9. Economic growth over time Positive output gap Trend output Positive output gap National output Actual output Negative output gap Negative output gap O Time

  10. Economic growth • Growth rates generally follow the pattern of boom followed by recession • Growth rates in developed nations often show a similar pattern to one another • It can be seen in the next graph how there are world boom periods and recessions

  11. Growth rates in the UK, France, USA, Germany and Japan UK Germany Japan France USA

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