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Identify and analyse the factors which affect Economic Growth - What Methods are used to calculate GDP and Economic Growth and Identify their weaknesses.

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Introduction

Identify and analyse the factors which affect Economic Growth. What Methods are used to calculate GDP and Economic Growth and Identify their weaknesses. Edward Cohen There are many factors which affect economic growth. It is important to first understand what this really means - economic growth is the increase in the productive potential of an economy in real terms and that can be represented by an outward shift in the production possibility curve. The benefits of this growth will be a higher standard of living because the output will increase so more goods and services can be bought. The main affecters to economic growth are; A rise in the productivity of existing factors through better organization, education, health and productivity of labour. By doing this the output will be increased because workers and businesses can achieve their full potential. If one firm invests in training in order to raise labour productivity, other firms will also benefit from the improved stock of human capital. These better trained labourers can be hired by other firms. If one firm invests in research and development the benefits can be use by other firms. For example a firm makes better and cheaper components when another firm buys the product they will benefit from the original firms investment into the improvement of the product. ...read more.

Middle

One problem with this method is double counting. An example would be if a music store bought a CD from a manufacturer for �5 and sold it to a consumer for �10 the contribution to the GDP is not �15, this adds up both the shop buying from the manufacturer and the consumer buying from the shop this is double counting. The ways to get around this is to just count the �10 paid by the consumer. The alternative is to include the extra value that each firm adds to an item this is called value added. To arrive at the final stage of all products we must add up the values added in each stage. A computer, for instance will go through 3 very basic stages; Stage 1 - A firm produces the raw materials and then sells them for �350 to firm "B". Stage 2 - Firm "B" manufactures the computer into a finished product and then sells it to the retailer for �650. Stage 3 - Finally Firm "C" sells them to households for �900. Using the value added method it would add to �350 + �300 + �250 = �900. It is also important to remember that stock appreciation must be deducted from value added. As it is the increase in monetary value of stocks due to increasing prices. Since this does not represent increased out put, it is not included in GDP. ...read more.

Conclusion

An electrician may work one evening outside his job and wire a friends house, he will probably ask for cash and not declare it. There are problems with using national income statistics to measure welfare, GNP is basically an indicator of a nation's production. However the following reasons undermine this; Sometimes production does not equal consumption. If GNP rises as a result of investment, it will not lead to an increase of the current living standards, although it will help to raise future consumption. Likewise the GNP should not rise because of increased imports, it will be foreign firms who benefit, not domestic consumers. The human cost of production - production may increase in a car factory because of technological advance. If, however it increases as a result of workers working harder, its net benefit will be less. This is because leisure and working conditions are desirable but are not included in the GNP figures. The rapid growth of in industry is recorded in the GNP statistics. However external costs are not taken into account such as polluted air and rivers, ozone depletion and global warming, so the net benefits of industrial production may be less. Total GNP figures ignore the distribution of income, some people become very rich and others very poor, particularly in developing countries. Therefore the problem of finding the real GDP is to put a greater weight on the growth of incomes of the poor people than the rich. ...read more.

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