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Study notes

Economic growth

  • Levels: GCSE, AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

All businesses operate within a competitive environment. However, the nature of competition varies from industry to industry. All businesses also operate in the economic environment. It is something they can do nothing about but they must understand and respond to changes in economic conditions.

A key part of the economic environment is the strength of the macro-economy. Macroeconomics is mainly concerned with:

  • The total level of spending (or demand) in the economy
  • Levels of employment and unemployment
  • The total investment made by businesses and government
  • The general level of prices
  • The rate of interest and exchange rates

The strength of the economy is always changing, although broad movements take time to occur. The level of activity in an economy can be measured in several ways, but the most common way is to look at the value ofgross domestic product (shortened to “GDP”) (the main measure of economic activity) in each period.

GDP is commonly used to measure economic growth and is made up of several parts:

The formula for is: GDP = C + I + G + (X − M)

where

C (Consumption)

I (Investment)

G (Government spending)

and X − M (Net Exports)

Economic growth is an increase in the value of goods and services produced by an economy over time.

There are two main ways to measure economic growth:

Actual growth (GDP)

Potential growth (trend growth)

The percentage annual increase in a country’s real gross domestic product over a period of time

The long run expansion of an economy’s productive potential

The % annual increase in national output

The increase in the capacity of the economy to produce

Caused by an increase in aggregate demand

Caused by an increase in aggregate supply

Potential output is that which could be produced if there was full employment of resources

Economic growth is a vitally important measure for several reasons:

  • Economic growth is about an increase in production within the economy
  • It is important because our living standards are influenced by our access to goods and services
  • Without growth, individuals can only enjoy rising living standards at the expense of others in society
  • With economic growth we can all (potentially) be better off

Why economic growth is important for businesses

Economic growth provides greater potential or opportunity for:

  • Increased profits
  • A rise in average living standards
  • The creation of new jobs
  • Lower unemployment
  • Increased tax revenues for government - used to fund more spending on government services
  • Improved business confidence
  • Increased capital investment
  • Technological innovation

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