Faculty of
Economic and
Management Sciences
CHAPTER 22
Economic Growth
&
Business Cycles
Text Book
pp. 462 - 485
LECTURE OUTCOMES
Once you have studied
should be able to:
• define economic growth.
this
chapter
• discuss how economic growth is measured.
• identify sources of economic growth.
• discuss the causes of low economic growth.
• define business cycle and its four elements.
• discuss the causes of business cycles.
• measure business cycles.
you
WHAT IS
ECONOMIC GROWTH?
• It is (traditionally) defined as the annual rate of increase
in total production (or total income) in the economy.
• It should be measured in ‘real’ terms (@ constant prices).
 economic growth should be adjusted for inflation.
• It should also be measured in “per capita” terms.
 economic growth should be adjusted for population.
CALCULATION
• To obtain a figure for economic growth in 2021, real GDP
for 2021 is compared with real GDP for 2020 and the
difference is expressed as a percentage of the 2020 figure.
Calculation
• Ethiopia is a small country. In 2021 the real GDP
was R3,15 trillion and in 2020 real GDP was R3
trillion. Calculate the economic growth:
SOUTH AFRICA`S MACROECONOMIC OUTLOOK
FIGURE 2: REAL GDP GROWTH RATE FOR SOUTH AFRICA (QUARTER-BYQUARTER PERCENTAGE CHANGE)
7,0%
6,3%
6,0%
4,6%
5,0%
4,0%
3,0%
1,9%
2,0%
1,2%
1,2%
1,0%
0,0%
2020 Q4
2021 Q1
2021 Q2
2021 Q3
2021 Q4
2022 Q1
-1,0%
-2,0%
-1,5%
Source: Statistics South Africa (2022)
SOUTH AFRICA`S MACROECONOMIC OUTLOOK
FIGURE 1: REAL GDP GROWTH RATE FOR SOUTH AFRICA (ANNUAL)
6,0%
4,9%
4,0%
2,0%
0,7%
1,2%
1,5%
0,3%
0,0%
2016
2017
2018
2019
2020
2021
-2,0%
-4,0%
-6,0%
-6,3%
-8,0%
Source: South African Reserve Bank (2022)
SOURCES OF GROWTH
Demand Factors
1. Domestic Demand (excluding imports)
 It can be stimulated by a rise in C + G + X.
2. Import Substitution
 Manufacture previously imported goods domestically.
 It is an attempt to replace imports (Z).
 It improves BoP.
3. Exports
 Much of SA`s economic growth is based on exports of minerals.
 It also improves BoP.
SOURCES OF GROWTH
Supply Factors
1. Natural Resources
 These include minerals (diamonds, gold, platinum) , fossil fuels (oil, coal,
natural gas), arable land, forests, timber, favourable climate, animals etc.
 New techniques must be developed to discover minerals through
exploration etc.
 These resources must be utilised sustainably(not just lie idle).
2. Labour
 The size and quality of labour is an important driver of economic growth quality is more important.
 Quality is influenced by education, training, nutrition, health etc.
 In SA quantity is not an issue but quality is.
 In the past decades the prevalence of HIV/AIDS has significantly affected the
quantity and quality of SA labour force.
SOURCES OF GROWTH
Supply Factors
3. Capital
 The quantity and quality of a country`s capital (machinery, buildings,
equipment, roads) is another important driver of economic growth.
 Quality of capital is improved by applying new technology to capital
equipment.
4. Entrepreneurship
 Every country needs people (called entrepreneurs) who can identify
opportunities and exploit them by combining the other factors of
production.
 Entrepreneurs are the driving force behind economic growth.
 Hence, obstacles that could act as deterrents to the development of
entrepreneurship should be eliminated.
WHAT IS
BUSINESS CYCLE?
• It is a pattern of upswing and downswing in economic activity
over time (a number of years).
• A complete cycle has 4 elements:
1. trough
2. expansion or upswing (boom)
3. peak
4. contraction or downswing (recession)
WHAT IS
BUSINESS CYCLE?
THEORIES OF
BUSINESS CYCLES
• Keynesians believe that business cycles:
 occur naturally and are an endogenous phenomena.
 require government intervention to apply appropriate policies such as monetary and fiscal
policies.
• Classical believe that business cycles:
 are temporary and are caused by exogenous (outside) factors
 Exogenous factors like changes in weather conditions affecting agricultural production.
• Monetarists (modern followers of the Classicals) believe that business cycles:
 are caused by ‘outside’ factors i.e. unsuitable government policies which increase money
supply.
 the government should leave the market system on its own.
 the market forces would restore equilibrium.
MEASURING
BUSINESS CYCLES
Business cycle indicators: Certain critical variables or indicators
that possibly reflect or predict movements in overall economic
activity. See also leading indicators and business cycle.
• Leading Indicators: The most important indicators of business
cycle activity, which tend to peak before the peak in aggregate
economic activity and reach a trough before the trough in
aggregate economic activity. They thus give advance warning of
changes in aggregate economic activity and help to forecast
business cycle movements.
MEASURING
BUSINESS CYCLES
• Coincident indicators: These indicators tend to
coincide with different parts of the business cycle.
• Lagging indicators: These indicators tend to lag
(follow after) different parts of the business cycle.
HOMEWORK- CALCULATION
Suppose the economy of the Republic of Zimba produces only beer, potatoes and shoes. The
following table shows the market prices of these products for 1999 and 2021 (in Rand), as well as
the quantities produced during 2021. Use 1999 as the base year and determine:
Product
Beer
Potatoes
Shoes
Price 1999
2.50
9.00
0.40
Price 2021
6.00
45.00
4.20
Quantity 2021
10000
4000
8000
1. Calculate the nominal GDP of Zimba 2021. (Always show the equations (or
formulas) and all your calculations).
Hint: : Nominal GDP 2021 = GDP@ nominal (current) prices
2. Calculate the real GDP for the year 2021.
Hint: Real GDP 2021 = GDP@ Real (constant) prices
NEXT CLASS – CHAPTER
21:UNEMPLOYMENT