Category Archives: Chapter 31: Economic Growth

Chapter 31: Key Words

GDP per Capita – GDP per Capita is the approximation of the total output of a country divided by the total population. It can be used to compare standards of living as typically, the higher the standard of living, the higher the GDP per Capita since it is the average output of the economy per person.

Total Output of Country/Population = GDP per Capita

Human Development Index (HDI) –

Rate of Economic Growth in Different Countries

Since developed countries are already efficient, its hard for them to experience large growth rates.

Developing countries can experience greater growth rates since they have a lot to improve on.

Some reasons as to why some countries may grow faster than others are: 

  • Exploiting natural resources
    • (e.g. oil, coal, etc)
  • Better education systems
  • Faster growth driven by higher level of investment
  • reflects long term economic maturity
    • MEDC’s don’t have much to improve on as they are already efficient so it would be difficult to experience greater growth rates as they don’t experience greater growth as a result of being more developed.
    • LEDC’s can experience greater growth rates as they have more to improve on.
  • Better Governance
    • e.g. a sign of bad governance could be corruption, etc.

How is the Standard of Living Measured?

Standard of living is the degree of wealth, material goods, comfort, and necessities available to a certain socioeconomic class in a certain geographic area.

There are a number of different ways to measure the standard of living but the most popular way is comparing GDP per Capita.

↑ in GDP = Hopefully an ↑ in GDP per Capita

Although, the problem with using GDP per Capita to measure quality of life is that it is an average, but wealth may not be well distributed in the country. 

e.g. One person in the country may have a GDP of $500,000 while another may have $10 but the GDP per Capita between the both of them would be $250,005

Human Development Index

Another popular way of measuring standard of living is by using the Human Development Index (HDI)

The human development index is a wider measure than GDP per Capita. It measures:

  • Real GDP per Capita
    • adjusted for foreign exchange rate
  • Educational Attainment
    • how many years an average person spends in school
  • Life Expectancy

It is set on a scale between 0 to 1.  Zero being the lowest possible value and 1 being the highest.  e.g. in 2008 Somalia had a score of 0.36 while Norway had a score of 0.95.

(disclaimer: these aren’t the official boundaries) 

  • 0 ≤ x ≤ 0.55  is considered relatively low
  • 0.6 ≤ x ≤ 0.7 is usually the range for medium/developing countries
  • 0.7 ≤ x ≤ 0.8 is for high/developed countries
  • 0.8 ≤ x ≤ 1.0 is very high/developed countries

Other ways to measure standard of living includes:

  • Comparing literacy rates
  • Gross National Happiness Index
  • Genuine Progress Indicator
    • Only measures the output that doesn’t harm the environment/ isn’t in the expense of the environment.
  • Population Density
    • e.g. too many people living in one city can lower standard of living (overpopulation)
  • Gender, racial and religious tolerance
    • e.g. In Saudi Arabia, women have less rights an example of this is that they aren’t allowed to drive or be out alone without a male relative.

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Difference between Real and Nominal GDP (per capita)

GDP is a measure of National Income. If national income is growing, it is called economic growth.

National income can be measured in 3 ways

Total Output = Total Expenditure = Total Income

There is two types of GDP, Real GDP and Nominal GDP. Nominal GDP is GDP before the effects of inflation and changes in price are taken into account. For this reason, nominal GDP can be distorted by inflation.

Real GDP is the measurement of GDP AFTER the effects of inflation and price changes are removed.

GDP- Effects of Inflation = Real GDP

Real GDP takes no account of:

  • What people can buy
  • Quality of/access to education, medical care, clean water, etc.
  • impact of growth on national environment

Introduction to the Economic Cycle

The Economic Cycle

The economic cycle is the irregular/natural of the fluctuation of the economy during periods of growth and expansion as well as the fluctuation of GDP from its trend or growth rate.

As you can see in the diagram, there is a pattern in the level of output over time, this is the economic cycle. There are 4 main phases that occur during an economic cycle, they are:

  1. Boom/ Peak – The peak of a cycle is called a boom. This is when the economy has reached its temporary maximum.
  2. Recession – When there is a period of decline in total output of the economy and may experience increased unemployment.
  3. Trough – Where the recession begins to even out so unemployment and output are at their lowest levels.
  4. Recovery – Lastly, during the recovery phase output and unemployment levels begins to increase again.