Sergejs Sedunovs

Macroeconomics (IA) (GDP growth)

The article1 that I have chosen talks about the Britains economic growth, but
more specifically according to experts this economic growth exceeds the
predictions of economic analysts. The prior estimate had stood at 1.5% for the
third quarter of 2013, however it was found that annual GDP grew by 1.9% in the
third quarter of 2013. Moreover the Britain has announced a greater than
expected drop in unemployment. However the ONS have claimed that
governments budget deficit have risen from 16.5bn in November compared
with 15.6bn in the last year. The debate here is to see whether this increase in
annual GDP will have more positive outcomes than negative ones.
GDP (Gross Domestic Product) can be defined as the value of all final goods and
services produced within a country in a given time period. It is worthwhile
mentioning that when comparing GDP figures from one year to another, changes
in the value of money also has to be taken into account which is the effect of
inflation and deflation. Thus it will provide us with the value of Real GDP.
Considering the value of GDP will indicate the economic growth which is an
increase in real GDP over time, more specifically an increase in the amount
goods and services produced by an economy over a period of time. Economic
growth is one of the essential macroeconomic objectives.

Figure 1

The figure 1 above demonstrates how an increase in aggregate demand from

AD1 to AD2 results in decrease of deflationary gap and thus an increase in real
output from Y1 to Y2. So in this case the economy is making better use of
unemployed resources and increasing GDP by moving towards the full
employment level of output (at LRAS) and thus achieving economic growth.

1 http://news.sky.com/story/1185462/uk-gdp-economy-growing-faster-thanexpected

Sergejs Sedunovs
The other way in which economic growth can occur is in the long term where
there is an increase in the full employment level of output. This can be seen in
the figure 2 below.

Figure 2

The shift from LRAS1 to LRAS2 is a result of an increase in GDP, thus achieving
economic growth. The rightward shift of LRAS curve can be due to many reasons
such as increase in the quantity or quality of factors of production. Alternatively
it could be government market forces that could shift LRAS curve to the right
such as supply side policies which could be either market-based or
interventionist.
Despite the fact that economic growth can bring lots of benefits to an economy
there are also potential negative consequences to it.
It is assumed that during economic growth aggregate demand tends to increase
as incomes of consumers and population size grows. The problem with this
however is that without government intervention such as supply side policies in
order to shift out the LRAS curve, there is a potential of aggregate demand
exceeding aggregate supply, thus causing inflation. On the other hand if
economy makes sure that it also improves supply side factors in order to shift
LRAS curve to the right, that will result in increased GDP without causing rising
pressure on the price level a to b, as shown in Figure 3. Non-inflationary growth is
demonstrated by movement from Y1 to Y2. Moreover there is a potential of more
labour being employed in order produce higher level of output, thus decreasing
the rates of unemployment.

Sergejs Sedunovs

Figure 3

As the result of economic growth there is an increase in national income which

means that GDP per capita will also increase. Depending on the population
growth the income of people on average will also increase which in turn will
result in higher standards of living. However it is important to say that even
know people will have more material gains there is still a chance that they will
sacrifice their personal leisure time.
Looking from the international perspective the higher productivity caused by
economic growth will make a positive impact upon the competitiveness of a
countrys exports. This means that there is a potential of an increase in
aggregate demand for a countrys goods and services.
One of the big problems that economic growth could bring is a structural change
in an economy. As a result of this change there is potential of structural
unemployment meaning that not everyone will actually benefit from economic
growth and therefore the income inequalities will widen.
Finally economic growth could result in negative externalities of production such
as larger greenhouse gases emissions due to the increased rates of production.

Sergejs Sedunovs

Bibliography:
Bakshi, D. Economic growth. Available: http://dineshbakshi.com/ibeconomics/macroeconomics/165-revision-notes/1890-economic-growth. Last accessed
5th Feb 2015.
Bakshi, D. Measures of economic activity | GDP-GNP. Available:
http://dineshbakshi.com/ib-economics/macroeconomics/165-revision-notes/1826measures-of-economic-activity-gdp-gnp. Last accessed 29th Jan 2015.
Blink, J & Dorton, I (2012). Economics Course Companion. 2nd ed. Oxford: Oxford
University Press. P244-248.
Sky news. (2013, 20th Dec). UK GDP: Economy Growing Faster Than
Expected. Available: http://news.sky.com/story/1185462/uk-gdp-economy-growingfaster-than-expected. Last accessed 5th Feb 2015.