Igcse Economics Notes

Economic Growth

• is the annual increase in the level of national output

• measured by the annual percentage change in gross domestic product.

Gross Domestic Product (GDP)

• C + I + G + (X – M)

• Real GDP : value of national income (GDP) that is adjusted for inflation.

• GDP per head : measures the gross domestic product of a country divided by its population size.

Benefits to Government and Society

• Tax Revenues: Increased government revenues from taxes enable public spending on crucial areas such as infrastructure, healthcare, education, and social welfare.

• Increased Spending: Government spending fueled by higher tax collections supports various public services and initiatives, improving overall living standards and societal welfare.

• Funds for Economic Development: Tax revenues facilitate investments in research, innovation, and infrastructure, fostering economic development and laying the groundwork for sustained growth.

Improved Standards of Living

• Higher Income Levels: Increased income levels provide individuals and families with greater financial stability, allowing for better access to goods, services, and opportunities for advancement.

• Meeting Needs and Wants: Economic growth fosters a more diverse market, catering to various needs and desires. This includes not only essential items but also improved quality and variety in consumer goods and services.

• Reduction in Absolute Poverty: Through job creation, increased incomes, and improved access to resources, economic growth contributes significantly to reducing absolute poverty levels, providing more people with the means to meet basic needs.

Employment Boost

• Higher Employment Rates: Economic growth often leads to an increased demand for labor across sectors, creating job opportunities and reducing unemployment rates.

• Increased Consumption: As employment rates rise and incomes increase, individuals tend to spend more, driving consumption, which, in turn, stimulates further economic activity.

• Encourages Further Investment: Businesses tend to invest more in expansion, innovation, and efficiency improvements during periods of economic growth. This can lead to increased productivity and competitiveness, further stimulating growth.

Benefits to Government and Society

• Tax Revenues: Increased government revenues from taxes enable public spending on crucial areas such as infrastructure, healthcare, education, and social welfare.

• Increased Spending: Government spending fueled by higher tax collections supports various public services and initiatives, improving overall living standards and societal welfare.

• Funds for Economic Development: Tax revenues facilitate investments in research, innovation, and infrastructure, fostering economic development and laying the groundwork for sustained growth.

Environmental Impact 

• Negative Externalities: Economic growth often generates pollution, greenhouse gas emissions, and land degradation due to increased industrial activity and resource extraction.

• Long-term Wellbeing: Environmental damage affects ecosystems, air quality, and natural resources, leading to health issues, loss of biodiversity, and challenges like climate change, impacting the wellbeing of both current and future generations.

Risk of Inflation

• Excessive Demand: Rapid economic growth can lead to increased consumer demand, potentially outpacing the economy's capacity to supply goods and services, triggering inflationary pressures.

• Demand-Pull Inflation: When demand surpasses supply, prices rise, leading to demand-pull inflation, which, if sustained, can destabilize prices and reduce international competitiveness.

Income and Wealth Inequalities

• Disparities in Distribution: Economic growth might disproportionately benefit certain segments of society, exacerbating income and wealth inequalities, widening the gap between the affluent and the marginalized.

• Widening Gap Between Rich and Poor: The wealthiest individuals or corporations often benefit the most from economic growth, leading to concentrated wealth and power, further amplifying inequality.

Resource Depletion

• Economic growth often relies on unsustainable utilization of natural resources, such as deforestation, overfishing, and excessive extraction of non-renewable resources.

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

Reasons :

Reduced Consumer Spending

• Job Losses: High unemployment rates result in decreased income levels, leading to reduced spending on non-essential goods and services.

• Income Reductions: Wage cuts, reduced work hours, or stagnating incomes diminish consumers' purchasing power.

• Consumer Confidence Decline: Economic uncertainty or pessimism about future prospects leads consumers to save rather than spend.

Decline in Business Investment

• Reduced Demand: Decreased consumer spending lowers demand for goods and services, discouraging businesses from investing in expansion or new projects.

• Uncertainty: Economic instability or uncertainty about future market conditions causes businesses to hold back on investments to avoid risks.

• Capital Expenditure Cuts: Businesses may cut back on capital expenditures due to decreased revenue expectations or limited access to credit.

Global Economic Factors

• International Trade Disruptions: Trade tensions, tariffs, or barriers disrupt global supply chains, impacting export-oriented industries and reducing overall economic activity.

• Weak Global Demand: A slowdown in major economies or global recessions can reduce demand for exports, affecting industries reliant on international trade.

Government Policies and Actions

• Tightening Monetary Policy: Central banks raising interest rates to control inflation can slow borrowing and spending, leading to decreased economic activity.

• Fiscal Restraint: Government spending cuts can lead to decreased aggregate demand.

Demand Side Policies

Fiscal Policy

• Taxation: Adjusting tax rates to influence disposable income and consumption. Tax cuts can stimulate spending, while increases may curb it.

• Government Spending: Direct government expenditure in infrastructure, healthcare, education, and social welfare programs to boost aggregate demand. Increased government spending can directly or indirectly create jobs in various sectors, reducing unemployment rates.

Monetary Policy

• Interest Rate Adjustment: Lowering interest rates to encourage borrowing and spending, fostering investment and consumption.

• Encouragement of Expenditure & Investment: Lower interest rates incentivize spending, which in turn can lead to increased economic growth and employment.

Supply-Side Policies

• Enhancing Competition: Policies that foster competition in markets can drive efficiency, innovation, and better allocation of resources.

• Boosting Productivity & Innovation: Investing in R&D, technology, and infrastructure to increase productivity, efficiency, and the quality of output.

• Promoting Economic Growth: Initiatives aimed at creating an environment conducive to business growth, leading to increased output and economic expansion.

• Examples of supply side policies: 

  • Education & Training Initiatives: Investing in education and skill development programs to enhance the quality and adaptability of the workforce.

  • Corporate Tax Reductions: Lowering corporate tax rates to incentivize investment, job creation, and business expansion.

  • Encouraging Risk-taking & Foreign Investment: Providing incentives or reducing barriers to attract foreign direct investment and spur entrepreneurial ventures.