Economic Essay CW3.doc - Theory Section Economic Growth is...

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Theory Section Economic Growth is “when there is an increase in the quantity of goods and services available in an economy” (Gillespie, 2013:65). In this essay, this section will address various economic concepts and economic issues in England such as the prevailing regional imbalance and will also offer insights into how the UK government aims to resolve this issue. “The growth of an economy is usually measured by changes in gross domestic product (GDP)” (Gillespie, 2013:422). GDP is “the value of output produced within the country over a 12-month period" (Sloman et al., 2016a: 472). Sloman et al. (2015; 409) notes that there are two kinds of GDP: real and nominal GDP; however, most economists prefer using the real GDP as opposed to the nominal GDP since nominal income gauges income at existing prices without adjustment for the impacts of inflation but the real GDP gauges the quantity of the output, which is usually adjusted for inflation and gauged at constant prices. There are two categories of economic growth, namely, actual and potential growth. Potential growth is “the percentage annual increase in the capacity of the economy to produce” (Sloman et al., 2016b: 472). The potential growth can be echoed by an increase in long-run aggregate supply, which indicates the total amount of goods and services produced by the national economy in a specific period of time (Business Dictionary, 2017). Figure 1: Relationship between Real GDP and Inflation Rate; Source: Chamberlin & Yuen (2006: 245)
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The classical diagram shows the relationship between the real GDP and the inflation rate. The shift in the long-run aggregate supply curve results from anything that acts to alter the equilibrium level of output, such as, changes in resources, such as, population growth, labor force participation, capital investment, and exploration. Haller (2012) proposes that an economy that has more of these particular resources will be characterized by a long-run aggregated curve that is shifted rightward. A number of factors contribute to potential economic growth. First, potential growth can only be achieved if an economy exhibits an increase in the volume of resources. For there to be an increase in the volume of resources, the existing enterprises should ensure that they increase the size of their workforce as well as the size of the available capital goods. Also, for an economy to exhibit potential growth, its economic sectors should increase the production efficiency of the available resources, which can be achieved via improving the available human capital as well as increasing the efficiency of the existing capital and improved utilization of the available natural resources. The actual growth is “the percentage annual increase in a country’s real gross domestic product over a period of time” (tutor2u, 2017a), which is reflected by the business cycle. The business cycle is “the observed pattern of increases and decreases in economic growth over the long term” (tutor2u, 2017b). Changes in the economic growth often results in subsequent changes in the output gap of an economy. Business
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