DEPARTMENT OF BUSINESS STUDIES

Economics Revision Notes Economic growth and Standards of living

Economic Growth Economic growth = an increase in the productive capacity of the economy. Economic growth causes the production possibility curve to shift to the right. This means that the output of goods and services in the economy increases, so that more wants can be satisfied. Output of capital goods

Economic growth

O Measurement

Output of consumer goods

Economic growth is measured by the rate of increase in the real national income. National income = the money value of the total output of goods and services produced by the economy in a year. = quantity of goods and services produced x prices of goods and services To get an accurate picture of economic growth, real national income is used so the effect of inflation does not give the wrong impression. National income is not easy to measure, so economists use the following approximation. Gross Domestic Product (GDP) = total money value of output produced by all domestic firms in the UK economy. Economic growth = rate of increase in real GDP.

Causes of economic growth Increase the quantity of land eg discover new mineral deposits Increase the quantity of labour eg cut school leaving age

Improve the ECONOMIC quality of land eg drainage schemes

ECONOMIC GROWTH

Improve the quality of labour eg training schemes

Improve the quantity of capital eg buy new machines

Improve technology eg better machines, new inventions

Consequences of economic growth The benefits of economic growth include Higher output should mean more consumer goods and services for people to enjoy a higher standard of living. Greater productivity may mean people can enjoy more leisure time, which will raise living standards. Higher output and income means more tax revenue for the government, so public sector services can be improved, again raising living standards.

The costs of economic growth include The depletion of scarce resources conservationists argue that growth must not be too rapid because the worlds resources will become exhausted and then living standards will drop rapidly. Increased externalities rapid growth could worsen the external costs associated with production, such as pollution, which will have an adverse effect on living standards. Technological progress may increase unemployment, which affects the living standards of people adversely because even the employed have to support the unemployed. The opportunity cost of growth is often less consumption in the short run so that there can be higher investment in capital.

Measures to promote economic growth There are various steps that the government can take to promote growth in the economy. o o o o o o o Improve the quality of the labour force pay grants to sixth formers to stay in education post-16 pay subsidies to firms towards the cost of training increase expenditure on health care increase expenditure on state schools Increase the quantity of labour lower the school leaving age raise the retirement age encourage immigration of key workers Increase the quantity of capital o lower interest rates o give tax allowances for investment o pay government grants for investment o increase expenditure on public sector capital projects eg road building schemes o tax incentives to encourage savings to provide funds for investment eg ISAs o o Technological progress fund research into new products at universities pay grants to companies towards research costs Policies to make labour markets more flexible eg reduce trade union powers, relax employment laws. Policies to encourage competition and to provide economic incentives eg privatistaion.

The Standard of Living Standard of living = an attempt by economists to assess how well off the people of a country are in order to establish if the economic problem of scarcity is being tackled successfully. Measurement There is no single measure that provides a complete picture of living standards. Several measurements are used to build up a composite picture. They include National income per capita national income (GDP/GNP) measures the total value of goods and services produced in a country. These are used to satisfy wants, so if national income is rising, it can be argued that more wants can be satisfied so living standards are rising. However, on its own national income gives no indication of how many people there are in the country to consume the goods and services. Hence, it is more accurate to use a per capita figure, which is obtained by as follows National income per capita = national income population size There are several potential problems when using per capita national income. o Inflation can boost national income over time and create the impression of rising living standards when in fact output is unchanged. This can be overcome by using real national income per capita. o The per capita figure assumes an equal distribution of income in the country, but this may be misleading. If there are a few very rich people and many poor, there could be a healthy per capita national income, but it would not represent the living standards of the people accurately. o The figure gives no indication of the working hours or conditions endured by people when producing the output. Long hours in unpleasant conditions could generate a high per capita national income, but people may have fairly miserable living standards. o The figure gives no indication of the externalities created by producing the output. If pollution levels are very high, people may not feel very well off, but the per capita national income suggests they have a good living standard.

o The national income figure excludes goods and services that people produce for their own consumption (eg home grown vegetables). Such output improves their living standard, but the per capita national income does not reflect it. In countries with high levels of subsistence, this is a particular problem. o The national income figure does not include any production that takes place in the black economy because this activity is illegal. However, output generated by the black economy improves living standards, but this is not shown in the per capita national income. Ownership and consumption data the ownership of certain goods among the countrys population or the consumption levels of certain goods by the population are other ways to assess living standards eg telephones per thousand people, energy use per capita, etc. Quality of life data figures on areas like health and education provision provide an indication of the living standard by looking at the basic requirements for a decent human existence. Common measures used include o Adult literacy rate = the proportion of the adult population that can read and write. o Life expectancy = number of years on average a person can expect to live at birth. o Infant mortality rate = number of babies who do not survive to 1 year of age per thousand live births per annum.