Economic growth Cambridge IGCSE Economics revision
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In plain words
An economy grows when it produces more goods and services than it did the year before. The usual measure of everything a country produces in a year is gross domestic product, GDP.
Prices rise too, which makes GDP look bigger without anything more being made. So economists take inflation out and look at real GDP.
6 things to know
- Economic growth is an increase in the real output of an economy over time. It is measured by the percentage change in real GDP.
- GDP is the total value of all the goods and services produced in a country in a year. Real GDP is GDP adjusted for inflation.
- Causes: an increase in total demand (which uses spare capacity), an increase in the quantity of resources (more workers, more investment in capital), or an increase in their quality (education, technology).
- Advantages: higher incomes and living standards, more jobs, less poverty, and more tax revenue for public services.
- Disadvantages: inflation if demand outruns supply, damage to the environment, natural resources used up, and gains that may go mostly to the better-off.
- GDP has limits as a measure: it leaves out unpaid work and the informal economy, and says nothing about how income is shared or about quality of life.
Worked example
A country's real GDP rises from $400 billion to $412 billion in a year. Calculate the rate of economic growth.
- Change in real GDP = 412 − 400 = $12 billion.
- Growth rate = change ÷ original × 100 = 12 ÷ 400 × 100.
- The economy grew by 3%.
Tips and tricks
- Always say "real" GDP when you define growth. A rise in GDP caused only by higher prices is not growth.
- Growth shows on a production possibility curve in two ways: a move from inside the curve towards it (using idle resources), or an outward shift of the curve (more or better resources).
It lands in your notebook with its questions as flashcards.
Economic growth: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Economic growth is best measured by a rise in
Real GDP is output with the effect of inflation removed.
Real GDP rises from $800 billion to $824 billion. What is the growth rate?
24 ÷ 800 × 100 = 3%.
Which could cause economic growth?
Better-quality labour can produce more.
Which is a possible disadvantage of economic growth?
More production can mean more environmental damage.
Why is real GDP used to measure growth, and not GDP at current prices?
Otherwise inflation would look like growth.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
4 questions, 10 marks. Write your answers on paper, then check them.
Economic growth
Cambridge IGCSE Economics 0455 · 10 marks · papermunch.org
Name ______________________________ Date ______________
Define economic growth.[2]
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An increase in the real output of an economy over time, measured by the rise in real GDP.
Real GDP rises from $250 billion to $260 billion. Calculate the growth rate.[2]
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4%. 10 ÷ 250 × 100.
Explain two benefits of economic growth.[3]
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More goods and services are produced, so average incomes and living standards rise. Firms need more workers to produce the extra output, so unemployment falls.
Explain one cost of economic growth.[3]
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More production uses more energy and raw materials and creates more pollution and waste, which damages the environment and uses up resources that cannot be replaced.
Answers: Economic growth
- 1. An increase in the real output of an economy over time, measured by the rise in real GDP.
- 2. 4%. 10 ÷ 250 × 100.
- 3. More goods and services are produced, so average incomes and living standards rise. Firms need more workers to produce the extra output, so unemployment falls.
- 4. More production uses more energy and raw materials and creates more pollution and waste, which damages the environment and uses up resources that cannot be replaced.