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.