Economic growth is the annual increase in the level of national output. An increase in the components of GDP (Gross Domestic Product) can lead to economic growth.

The GDP entails:

Consumption: This is the total spending on goods and services by individuals or households in an economy. This spending can be as a result of domestic holiday, housing, transport or food etc.

Investment: This is the capital spending done by firms to increase production and to expand the economy’s productive capacity. This spending can be derived from spending on machines or new productive technology.

Government Spending: This is the total consumption and investment expenditure of the government. This considers spending on public and merit goods, though this spending ignores payments made to people without corresponding output e.g welfare payments

Net export: Net export details the difference between export and import during a period of time.

  • Export: This computes the monetary value of all exports sold to foreign buyers
  • Import: This computes the monetary value of all payments for imported products into the country.

Formula for GDP = C + I + G + (E – I)

Where C= Consumption, I = Investment, G = Government Spending, E = Export and I = Import

Components of GDP

Gross Domestic Product (GDP) is the total market value of all of the goods and services provided from within the borders of a country during a set time period.

There are two primary ways of measuring GDP: nominal gross domestic product and real gross domestic product.

  • Nominal GDP: This measures the monetary value of goods and services produced within the country during a given period of time.
  • Real GDP: This is the value of GDP adjusted for inflation to reflect the true value of goods and services produced in a given year.

Causes and Consequences of Recession

Recession occurs in the business cycle when there is a fall in GDP for two consecutive quarters.

Causes of recession

  1. Higher level of unemployment
  2. High interest rates which discourages investment and raises demand for savings
  3. High level of uncertainty in the economy
  4. Lower rates of disposable income causing a fall in consumer spending
  5. Lower levels of government spending
  6. A decline in the demand for exports
  7. Lower levels of consumer and business confidence

Causes and Consequences of economic growth

  1. Labour Force: An increase in the skills, size and mobility of the workforce in an economy has a direct impact on the country’s economic growth. The more mobile workers are the higher their rate of their output in the economy.
  2. Labour Productivity: this refers to the amount of goods and services that workers produce in a given time. Labour productivity can be enhanced by the technological advancement, qualification, training and motivation of the labour force. An increase in labour productivity improves international competitiveness and better prospects for economic growth.
  3. Investment expenditure: Investment is a component of overall demand in the economy, so an increase in investment would help boost country’s GDP. Investment spending on physical capital can also improve labour productivity.
  4. Factor Endowments: This is the quality and quantity of the country’s factor of production. An economy would abundance factor of production can enjoy economies of scale and export their lower priced product overseas.
causes of economic growth

Positive Consequences of Economic Growth

  1. Improved Standards of living: economic growth tends to lead to higher standards of living for the average person. Higher income levels in a country enable more people to spend more money to meet their needs and wants which eliminates absolute poverty within the economy.
  2. Employment: Economic growth can lead to higher employment as there is a rise in consumption and encourages further investment in capital helping to sustain economic growth.
  3. Tax revenues: As a result of increased spending, there will be more tax revenues for the government from various sources such as sales tax, corporation tax and import tax. This gives the government more ability to provide public and merit goods for the economy.
positive impacts of economic growth

Negative consequences of Economic Growth

  1. Environmental Consequences: high rates of economic growth can create negative externalities such as pollution, climate change or erosion which can impact and damage the health of citizen within the locality
  2. Inflation: As a result of an increase in demand, demand pull inflation can come into existence. This can lead to an increase in price of goods and services with negative consequences to the economy.
  3. Resource depletion: Economic growth often involves using up the world’s scarce resources at rates that are not sustainable.

Policies to promote economic growth

  1. Fiscal Policy: The use of taxes and government spending can be of immense help at this point in time. If the demand is too low, the government may choose to stimulate economic growth by cutting taxes and increasing its own expenditure in order to boost the level of economic activity.
  2. Monetary Policy: with lower interest rates, the cost of borrowing would reduce which can help fund consumer expenditure and business investments thereby boosting economic growth
  3. Supply side Policies: Policies such as selective tax incentives could help boost production within an industry as it would boost productive potential within the industry thereby increasing outputs which ultimately leads to economic growth for the economy. Investing in Education and Training to increase skills, knowledge and mobility of current and future workforce.