Unit Four

What is growth?

Economic activity is the amount of buying and selling that goes on in a country over a particular period of time

GDP is the total value of output produced in an economy in a year

Economic growth is the percentage increase in GDP per year

Economic growth can be increased by increasing output by purchasing more resources or using existing resources more efficiently. Resources include:

• Land
• Labour
• Machinery

An investment is when a business spends money on improving the number or quality of their resources.

Physical capital investment - Spending on new assets such as factories or machinery which enable a firm to produce more output

Human capital investment - Spending on training and education which allows workers to be able to produce more output in the future

The government can contribute in economic growth by encouraging investments through reducing taxes on profits and providing grants. The government can also improve the resources that it owns, allowing firms the ability to produce more such as improving transport infrastructure. Infrastructure is a major limiting aspect of economic growth in LEDCs.

Does growth increase the standard of living?

Standard of living is the amount of goods and services a person can buy with their income in a year.

Economic growth > GDP rises > Average standard of living rises

GDP per capita is the value of output produced by a country in a year divided by the population of that country.

Problems using GDP:

• Distorted GDP when population of the country is small
• GDP assumes that everybody in a country is equal

Income inequality is where there is a difference in income between different groups of people within a country

Alternative to GDP:

• Quality of life- An individual’s overall sense of wellbeing. It can be measured by health, education or the amount of goods and services a person buys
• Infant mortality rates- The percentage of those who do not survive past their fifth birthday
• Life expectancy- Average age which people are expected to live up to
• Literacy rates- Percentage of adults who are able to read and write

Can growth be bad?

Negative externalities:

• Congestion
• Non-Renewable resources being wasted
• Waste
• Pollution

Can growth be sustainable?

Sustainable economic growth - An increase in GDP which minimises negative externalities faced by future generations

Renewable resources - Resources that are not limited in supply and are naturally replaced in the environment (such as solar)

Energy from Renewable resources are generally more expensive

A CSR report is expected by businesses. Arguably businesses treat their shareholders better in an attempt to add value and charge more for their products (Green wash).

Ethical responsibility - Where a business takes a moral stand point and ensure that its behaviour does not impact stakeholders in a negative way

What can the Government do?

What the government can do to change behaviour:

• Taxes (price of product rises, demand goes down)
• Subsidies (price of product goes down, demand goes up)
• Legislation (laws passed by the government. Legislation can cause the restriction or ban of production of something considered ‘bad’. Those who break the rules are punished)
• Regulation (A set of rules imposed to govern the way something is carried out)

Internalising an externality - Turning an unconsidered external cost into a considered private cost which is paid in money. Example includes making the driver of a heavily polluting vehicle pay more tax.

If a business’s costs increase they can pass the cost increase to the consumer or try and increase efficiency by cutting costs elsewhere.