Question

what happens when any of the determinants of components of GDP change? explain why each step in process occurs. use written explanations.

Answer 1

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A) Consequences of change in factors on the GDP Growth

Abstract

Let us understand the factors that affect the changes in GDP

There are several Factors Of Economic Growth that lead to growth of country’s GDP, Factors such as natural Resources-the discovery of natural resources like oil, or mineral may boost economic growth as this shifts or increases the country's Production Possibility Curve.

Along with this other factors such as Physical Capital or Infrastructure, Population or Labour, Human Capital, Technology, Law etc are more important to affects the GDP Growth of Country.

Demographic changes can affect GDP growth through several channels. First, lower growth in population directly implies reduced labor input.

Second, lower population growth has an indirect potentially negative impact on individual labor supply in so far as it leads to higher tax rates which reduce the incentive to work.

Third, under the life-cycle hypothesis, it demonstrated that people move from being net borrowers in their youth to being net savers in their working years and finally to dis-savers in their elderly years.

Therefore, if the share of elderly in the population rises, aggregate savings would fall, leading to lower investment growth, and, in turn, lower GDP growth.

Increased investment in physical capital, such as factories, machinery, and roads, will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This higher productivity can increase output. For example, having a robust highway system can reduce inefficiencies in moving raw materials or goods across the country, which can increase its GDP.

Another influential factor is the improvement of technology. The technology could increase productivity with the same levels of labor, thus accelerating growth and development. This increment means factories can be more productive at lower costs. Technology is most likely to lead to sustained long-run growth.

An institutional framework that regulates economic activity such as rules and laws. There is no specific set of institutions that promote growth.

B) Factors contributing each step in process of GDP Change

Expansion is the phase of the business cycle where real GDP grows for two or more consecutive quarters, moving from a trough to a peak. This is typically accompanied by a rise in employment, consumer confidence, and equity markets. Expansion is also referred to as an economic recovery.

Slow down / Recession is another phase of Business cycle, When the economy is healthy, there is usually low unemployment and wage increases, as businesses demand labor to meet the growing economy.

If GDP is slowing down, or is negative, it can lead to fears of a recession which means layoffs and unemployment and declining business revenues and consumer spending.

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