Growth

Economic Growth

Economic Growth

 An increase in an economy’s real GDP per capita. (GDP is measured by taking the

market value of all final goods and services produced in the country in a year.)

 An expansion in the economy’s capacity to produce goods and services.





GDP Deflator

 A price index based on a representative basket of GDP goods and services. (Includes

not only consumer goods, but also capital, and government goods and services.)

 The GDP deflator allows us to distinguish between nominal GDP, which has no

adjustment for inflation, and real GDP, which removes any inflation that might have

occurred during the time frame in question.



Nominal GDP  The value of GDP in terms of prices prevailing

at the time of measurement.

Real GDP  The value of GDP measured in terms of prices

prevailing in a given base year.



Real GDP = nominal GDP x 100

GDP deflator



 The Canadian nominal GDP in billions of dollars, and the GDP deflators for a six-

year period were as follows:



Year Nominal GDP GDP Deflator Inflation Rate Real GDP

1992 $690 100.0

1993 725 101.3

1994 762 102.4

1995 799 105.1

1996 820 106.5

1997 855 107.1



Calculate the rate of inflation, and the real GDP for each year.

Benefits of Economic Growth

1) Enables society to better meet the social needs of its population.

2) All of us have more opportunities and are far richer materially than our ancestors.





Sources of Economic Growth

1) The quality of an economy’s labour resources.

 A highly educated population results in a labour force that is smart, mobile, and

adaptable. This is essential in an era of information / communications.

 Labour Productivity is a measure of the amount of output produced per unit of

labour input.

 Human Capital is defined as the accumulated skills and knowledge of human

beings. Well-funded and innovative education and training efforts will help an

economy in this area.



2) The amount of physical capital available within the economy.

 Increasing the amount of capital stock in an economy is a direct result of more

investment spending and often means sacrificing current consumption.

 An economy with a higher capital / labour ratio will be an economy with higher

labour productivity.

 Canada has one of the highest capital / labour ratios in the world.



3) Technological change.

 This refers to producing better machines (not just more machines), and finding

more efficient ways of extracting natural resources (rather than just finding more

natural resources).

 This is the process of becoming more productive.

 Economic growth can be stimulated by spending on research and development

(both in the public and private sector).



4) Amount and quality of an economy’s natural resources.

 Canada is richly endowed in this area. This makes economic growth easier, but

does not ensure it.





Economic Growth and the Business Cycle

 All economies experience business cycles in that every economy goes through

expansionary and contractionary phases in the rate at which real GDP

changes.

Problems of Measuring GDP

1) When looking at GDP, we are trying to measure the value of all final goods and

services produced in an economy in a year. As such, the following categories of

items must not be included in the calculations:

a) The inclusion of intermediate goods would represent double-counting.

 Tires are counted only as part of the value of the finished car.

b) The sale and purchase of financial transactions like stocks and shares are not

included because they merely represent the transfer of ownership between people.

 The value of the services of the stockbroker who made the transfers are included

however.

c) Public transfer payments (i.e. CPP, UIC, etc.) and private transfer payments (i.e.

gifts, donations, etc.) are also excluded.

d) Second-hand sales are excluded.



2) The value of a good or service is measured by its market price, but its market

price also includes sales taxes. Therefore, many people suggest that national

income is a better measure of an economy’s performance since it excludes all

indirect (sales) taxes.



3) GDP figures give no indication of the quality of goods and services produced,

nor do they tell us what types of goods are being produced.



4) GDP calculations take no account of the fact that the social and environmental

costs of economic growth may well exceed the benefits.



5) Some items are not included in the GDP calculations even though they do

represent real effort.

a) All goods and services that are produced but which are not sold in the market are

excluded.

 Crafts produced for personal use.

b) Some things are excluded because Statistics Canada does not hear of them. Such

underground economic activities are paid for under the table.

 Illegal activities.

 Activities not reported to tax collectors. (i.e. hairdressing or baby-sitting at home.)

c) Some productive services like the value of a home-maker, do-it-yourself work, and

voluntary work are non-market activities, and are therefore not included in GDP.