Economic Growth

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    Output Gaps The difference between actual GDP growth and the long-term trend growth rate is the output gap. A positive output gap occurs when real GDP growth is above its trend. A negative output gap occurs when real GDP growth is below its trend.

    Sustainable Growth Economic growth is sustainable if the needs of future generations are not compromised by current consumption/production. In the movie The Road (starring Viggo Mortensen), the planet’s resources have basically ran out and no more goods can be produced. If the current generation produces too much now then future generations may have no resources to produce goods.

    Comparing Living Standards Between Economies An economy with a large population will likely have a higher GDP than an economy with a smaller population because the larger one can produce more. It is unfair to compare their GDPs. Instead, GDP per capita must be used to compare economies. GDP per capita is GDP divided by population, it measures the average GDP per person. An economy could have a high GDP but a low GDP per capita in contrast to another economy with a low GDP but high GDP per capita, the average person is better off in the second economy.
    Even GDP per capita does not accurately measure the welfare or living standards of an economy. Many other factors affect welfare:

    1) Health.

    Better health means better living standards.

    2) Social Indicators.

    Better education and less crime means better living standards.

    3) Political Freedoms.

    GDP does not measure democracy or dictatorship.

    4) Income Distribution.

    High GDP per capita does not necessarily mean income is distributed evenly. An economy could have a high GDP per capita if there is one extremely rich person and the rest are poor.

    5) Black Economy.

    GDP only measures official transactions, it does not measure illegal transactions in the black economy. Also, DIY at home and other cash-in-hand transactions are not included.

    6) External Costs.

    A high GDP means a lot is being produced so pollution may be high. Pollution could damage health and lower living standards. Also, too much production could mean resources deplete and future generations suffer lower living standards.

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