How is economic growth measured? Watch

magicalwishes
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I'm going through some past econ unit 4 questions and I'm just checking if I got my answer right for the (aqa) june 2010 question 2.

Analyse how trade and investment can help to bring about economic growth.

So for trade I did a chain saying:
increase in AD - increase in output - increase in production - increase in GDP - increase in economic growth.

And for investment I did:
Increase LRAS - able to produce more and increase efficiency - lowers cop - lowers APL (supply and demand diagram) - increase AD - increase output - increase GDP - increased growth.


Just checking, is that correct?


Also, im super confused on how economic growth is actually measured. I thought it was measured by an increase in GDP so the value of goods and services produced in an economy. But some say its a result of a rise in national income?

Thanks
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Chrono5
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Trade can be either exports/imports, increased exports increases the economics activity through AD (C+I+G+(X-M)), increased imports, however, reduces AD, so it DEPENDS on the type of trade/relation between X&M, is X>M if so then increases GDP, else, reduces it (leakage in circular flow). Your logic chain is good; but add evaluation throughout, depends points are always good ones to do! E.g. depends on: a) relative size of change in X/M, b) multiplier effect increases GDP more-so over time, c) depends if economy is in positive output gap, if so, then bad (inflation, draw Keynesian LRAS to show over-heating) if negative output gap then good, also depends on whether the LRAS is perfectly elastic over the range which AD increases, reduces the negative of inflation if so.

For investment, your chain is good, but remember evaluation, too!

GDP = national (aggregate) income = also aggregate expenditure; they're all the same thing!
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rasclerhys
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When talking about economic growth for Unit 4 they are also referring to potential economic growth. This is effectively what the economy can produce, not just the amount of goods and services produced (this includes consumers good/services economic growth focuses more on capital goods).

Hence trade plays an important part because exports allow a country to accumulate foreign exchange reserves which then allow it to import capital goods from abroad. This allows economic growth because now the country has a greater stock of capital which allows it to produce more goods and services which it can consume to increase its standard of living or export to promote further economic growth. Ergo, a trade deficit isn't a bad thing if a country is importing capital goods which will allow it to export (and run a trade surplus) in the future.

Investment is useful for the same reason; domestic firms won't always have the knowledge and resources (particularly in developing countries) to expand. Therefore inward FDI (foreign direct investment) can benefit the economy because it gives it knowledge, resources and tax revenue.

Hope these ideas help.
Let me know if you need some more!

Rhys
www.learneconomicsonline.com
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