Economic Growth

GDP= Gross domestic product (total output)

Nominal GDP- GDP measured at current prices

Real GDP- GDP measured after adjusting for inflation. GDP at constant prices. 

Methods of Calculating GDP

1. Expenditure method: adding up all the expenditure on the country’s finished output. C+I+G+(X-M)
2. Output method: adding up the output produced by all industries in the country. (value-added method to prevent double counting).
3. Income method: incomes that have been earned by producing the nation’s output. (adding payments to factors of production i.e. rent, wages, interest, and profit. Transfer payments are not included).

Real GDP per Head

It is found by dividing the Real GDP by the population.

It is also called real GDP per capita.

It is used to indicate the living standards in the country.

Problems encountered in measuring GDP

1. Activity is not recorded as the business is too small and hence carries high costs of registration
2. The product being dealt with is illegal 
3. The person making the product wants to avoid paying tax
4. The activity may be legal but the person providing it might not be legal (IMMIGRANTS)
5. Some products being produced are being used for self-consumption

Factors affect the size of undeclared activity

1. No activities declared illegal
2. Tax rates
3. Penalties for tax evasion
4. Government regulations

Recession

Recession occurs when real GDP decreases for 2 successive quarters or more. 

Two categories of causes of recession 

1. Decrease in Aggregate Demand(Demand-side shock)
   1. Decrease in consumer expenditure or investments due to lack of confidence in the future due to global financial crisis etc.
   2. Reduction in government expenditure
   3. Fall in net exports due to rise in exchange rates.

2. Decrease in Aggregate Supply(Supply-side shock)
   1. Rise in fuel or raw material costs
   2. Increase in wage rates around the country

Consequences of Recession

1. Unemployment
2. Reduction in output and incomes will lower living standards
3. Investment from foreign MNCs will reduce
4. Tax revenue will fall
5. Government spending on benefits will increase leading to a budget deficit
6. The price level will change based on whether the recession is caused by demand-side shock or supply-side shock

Economic Growth: Causes

In short-run:

1. An increase in AD can lead to increase in output if unused resources exist

In long-run:

1. Increase in quality and quantity of resources 

Economic growth: Consequences

1. Better living standards
2. Higher output and incomes will increase government revenue without an increase in tax rates
3. A country’s political standing in the IMF may increase
4. Increase in pollution due to depletion of non-renewable resources
5. Increased output might put greater stress on workers

Not all economic growth can increase standards of living. When the economy is working at full capacity, the economy will reallocate resources from producing consumer goods and capital goods. Then, in this short period, the standard of living will fall.

The Economic Cycle

The business cycle or economic cycle refers to the pattern of recurrent ups and downs observed in real GDP growth over time in many economies. 

1. Growth

• Economic activity is expanding rapidly
• Firms enjoy increased sales
• Now businesses are forms
• Output, income, and employment rise

2. Economic Boom

• Aggregate demand, sales, and profits peak
• Rapid inflation may take place(overheating) + government may raise interest rates
• Shortage of labour
• Low unemployment + wage rise
• Confidence may decline(due to inflation)

3. Economic Recession

• The slowdown in economic activity
• Demand falls
• Sales and profits decline
• Workers are made redundant
• Unemployment rises + incomes start to fall
• Economic growth turns negative
• Firms reduce investment in new plants and machinery
• Competition rises as firms compete to survive

4. Recovery

• Business and consumer confidence started to recover. Spending on goods and services increase
• Sales and profits increase
• New businesses are formed
• Unemployment falls and incomes rise
• Economy starts to expand