CHAPTER 29:
Economic Growth
29.1 Definition and measurement of
economic growth
1. Gross domestic product (GDP)
GDP means the total output produced in a country.
There are three methods of measuring this output: the output, income and expenditure.
2. The methods of calculating GDP
 The output method measures GDP by adding up the
output produced by all industries in the country.
Care has to be taken in using this method to unsure
that output is not counted twice.
 The income method includes all the income which
has been earned in producing the country’s output.
There is no corresponding output on good or
services so transfer parents as unemployment and
pension are not included.
 The expenditure method calculates GDP by adding
up all the expenditures on the country’s finished
output. Some of this comes from foreigners when
country’s exports are bought.
3.Nominal and real GDP
Nominal GDP is valued in terms of the prices operative
at that time. It has not been adjusted for inflation. For
example: - if price rise by 20% in a year, there will be a
20% rise in the nominal GDP.
Real picture of a country’s output and assess its
economic growth, economies adjust nominal GDP by
taking out the effect of inflation. For example: - a rise in
the real GDP of 5% would mean that the country’s
output has increased by 5%.
4.Real GDP per head
Rise in the real GDP means that more goods and
services have been produced. Its impact on the goods
and services available to people, will depend on the
state of population. To find out what is happening to
people’s living standards, economist calculate real GDP
per head. Changes in population size can make a
significant contribution to changes in real GDP.
5. The difficulty of measuring real GDP
GDP figures tend to understate the true level of output.
There are number of reasons why economic activity
goes unrecorded:  One is that activity is on small scale and there are
relatively high costs of registering a business.
Another reason is that the activity is illegal, such as
illegal drug dealing and work undertaken by
immigrants who have not been given permission
to work in the country.
 Second is that the size of undeclared economic
activity is influenced by a number of actions. These
include activities like illegal, tax rates and penalties
for tax evasion.
 Third is that there are also non-marketed good and
services. These are products which are not bought
or sold
29.2 Recession
A recession occurs when real GDP declines over a
period of six months or more.
1.Causes of recession
There are number of ways why aggregate demand may
fall. These reasons are sometimes referred to as
negative demand-side shocks. The government may cut
back its spending too much and net exports could fall
as a result of a rise in the exchange rate.
A decrease in aggregate demand supply, a negative
supply-side shock, could result from a rise in fuel or raw
materials costs.