Igsce Econ CH 25

Section 2: The government
and the economy

Unit 25: Economic growth
CHAPTER 25
Main Aim:
Students will understand the macroeconomic objectives of the government and the
importance of economic growth
Lesson Objectives
All Students will understand what is economic growth
Most Students will understand the inter-relationships and potential conflicts between macroeconomic
objectives
Some students will know how to achieve an A* in 9 mark exam questions
Activities: Keywords / Key Terms:

• Macroeconomics short-video • Government intervention
• Government intervention worksheet • Economic growth
• Class Discussion – Trees and forests
• GDP
• 9 Mark Past Exam Question
OBJECTIVES - GOALS
 Outline the macroeconomic aims of government

 Explain the reasons behind the choice of aims and the criteria that
governments set for each aim
 To discuss the possible conflicts between macroeconomic aims
Economic growth : Basic definition
 Economic growth: The annual increase in the level of national output –

that is the percentage change in gross domestic product
MACROECONOMIC OBJECTIVES: AN
OVERVIEW
GROSS DOMESTIC PRODUCT
Economic growth and PPC
GROWTH
→: Increase
RECESSION
←: Decrease
GDP THE SPECIFICS AND AN EXTRA
FORMULA
 GDP measures the value of all goods and services that are produced in a
country for sale.
 It includes both goods that are sold domestically (within a country) and those
sold overseas.
 GDP only measures final production. The manufacture of parts and
components used to make another product are not included.
 Exports are included because they are part of domestic production. Imports
are subtracted because they represent the output of another country.
GDP = C+I+G+(X-M)
C: Consumption I: Investment G: Government spending X: Exports M: Imports
GDP: LIMITATIONS 1/2
 Inflation: GDP doesn’t take into account the increase in the average level of
prices known as inflation. A GDP growth rate of 2% when inflation rate is 4% is
actually bad news. Real GDP (inflation adjusted) is more appropriate
 Population: An increase in population may offset the growth in GDP. GDP per
head or per capita can be calculated by dividing GDP by the size of the
population
 Statistical measures: Gathering the data needed to calculate national income
is a huge task. The government collects millions of documents from firms,
individuals and other organisations, mistakes are unavoidable.
 Value of home produced goods: Some goods and services are not traded and
therefore economic activity is not recorded such as growing vegetables in a
back garden which is an important part of consumption in underdeveloped
countries so national income is underreported
GDP: LIMITATIONS 2/2
 Hidden economy: Sometimes paid work goes unrecorded. The transaction

becomes part of the hidden, 'black' or informal economy. Certain paid services
go unrecorded in this way.
 GDP and living standards: GDP won’t take into account
• whether growth has resulted in pollution
• the quality of goods and services.
• the way extra income is shared between the population
• the amount of leisure time people have
 External costs: GDP does not take into account external costs such as
environmental costs and the negative impact they have on the well being of a
society.
THE ECONOMIC CYCLE
Recovery: When GDP

starts to rise again and
confidence in the
economy has resumed
THE ECONOMIC CYCLE IN MORE DETAIL
THE ECONOMIC CYCLE - PHASES
 Boom: A boom, as the name implies, is a period in which the GDP rises higher
than its previous long-term trend. It signifies increased productivity, higher
sales, and thus, higher wages. This may result in higher inflation (increase in
price of goods and services). Inflation has many repercussions on an economy.
 Slowdown: A slowdown, the opposite of a boom, is a period marked by
decreased GDP, lower sales, lower market demand, and thus, lower inflation.
 Recession: This is a period of decline in the output of an economy for two
successive quarters. This can have long-lasting effect on wages, the stock
market, and the population as a whole.
 Recovery (Expansion): This period generally goes after a recession and is a
sign of improvements in an economy following a decrease in output.
 Depression: This signifies a long-term economic downturn in the activity of a
market. It is much more severe and persistent than a recession.
THE IMPACT OF ECONOMIC GROWTH 1/2
 Employment: Higher output leads to more demand for labour leading to

lower unemployment usually government spending is also leading to job
creation in the public sector such as public schools and hospitals
 Standards of living: Higher GDP growth rates means that on average people
have more income. With more disposable income, people can buy more
goods and services. They can buy better quality food, improved housing and
more leisure goods. As the economy grows, it is possible to spend less time
working → efficiency gains.
 Poverty: Expansion of existing businesses and the creation of new
businesses create jobs, some of which will be taken by the poor. Also there is
more tax revenue which can be used to improve public health and education,
provide welfare benefits helping the poor
THE IMPACT OF ECONOMIC GROWTH 2/2
 Productive potential: PPC shifts to the right → an economy can produce

more goods and services
 Inflation: If economic growth is too fast, the economy may overheat. This
can cause inflation, which is bad for an economy
 The environment: Environmental groups believe that the benefits of growth
are lower than the costs of generating that growth so there is an opportunity
cost. Rapid economic growth in fast-developing countries has led to
environmental deterioration like in China and India. Economic growth uses up
non-renewable resources such as oil, gas, gold and iron ore. Once they have
been used, they cannot be replaced. Future generations will have fewer
resources → unsustainable growth
Unemployment: Basic definition
Unemployment: When people are willing and able to work but are unable to find
a work
Unemployment and PPC
F: Unemployment
G: Impossible
Unemployment rate
Labour force 30m

Population of working age 35m
Unemployment rate 8%
Answer:2.4m ???
Inflation: Basic definition
 The sustained rise in the general price level in an economy.

 Most governments set a target inflation rate in order to control economic
activity
 Inflation is measured with the use of a Consumer Price Index CPI. This
weighted index measures the change in prices in a representative basket of
goods and services consumed by the average household of an economy
Balance of payments stability
 The balance of payments is a financial record of a country's transactions with

the rest of the world over a given time period – usually a year
 It includes a country’s trade in goods and services with other countries
Credit items: Payments received from other countries
Debit items: Payments made to other nations
There can be a surplus or a deficit or a balanced – neutral balance of payments

Redistribution of income
 It is the macroeconomic aim of achieving greater equality in the distribution

of income in an economy
 In every free-market based economy there is a “naturally” unequal ownership
of factors of production
 Taxation has a redistribution effect when it is progressive other ways of
achieving income equality include subsidies and welfare benefits
Possible conflicts between
macroeconomic aims
 Full employment vs stable prices: More money to spend → higher demand →
Demand-pull inflation (Demand>Supply). Cost-push inflation: Higher
demand for skilled labour (harder to find) → higher wages
 Economic growth vs balance of payments stability: ↑ consumption → ↑
imports → deficit – especially when there is also inflation
 Full employment vs balance of payments stability: Higher wages → ↑Imports
and Cost-push inflation
 Economic growth vs stable prices: A cut in interest rates or a increase in the
money supply will lead to economic growth, however it will also cause
demand-pull inflation

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Igsce Econ CH 25

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Section 2: The government

and the economy

Activities: Keywords / Key Terms:

 Outline the macroeconomic aims of government

 Economic growth: The annual increase in the level of national output –

 Hidden economy: Sometimes paid work goes unrecorded. The transaction

Recovery: When GDP

 Employment: Higher output leads to more demand for labour leading to

 Productive potential: PPC shifts to the right → an economy can produce

Labour force 30m

 The sustained rise in the general price level in an economy.

 The balance of payments is a financial record of a country's transactions with

There can be a surplus or a deficit or a balanced – neutral balance of payments

 It is the macroeconomic aim of achieving greater equality in the distribution

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