Growth and recession

Growth

Economic growth occurs when consumption or injections increase or when leakages decrease. The cross diagram illustrates the key role of injections and leakages in the expansion or contraction of an economy

Growth means there are sustained increases in real national income (GDP), which commonly means at least two consecutive quarterly increases in real GDP.

Growth is often regarded as the key macroeconomic objective given that standards of living and expenditure on healthcare and education depend upon a growing economy. As an economy grows, incomes rise and the consumption of goods and services increase - leading to higher living standards. Also, tax revenues increase so that governments can allocate more to merit and public goods.

Excessive growth

While economic growth is an important macro-economic objective, the growth rate must be sustainable - otherwise it can conflict with other objectives.

The most important metric for assessing growth is the 'trend rate' of growth. This is the rate of growth that can be achieved without experiencing other problems, such as inflation and trade difficulties. This rate approximates to the growth in the potential output of an economy in the long run.

One useful approximation of the trend rate is the long term average rate of growth when short and medium term fluctuations have been removed, but there are other methods which 'filter out' other variables or events.

Injection-led growth can follow an increase in corporate investment, or government spending, or through an increase in exports.

Injection-led growth

Growth
Video on economic growth and recession

Leakage-led growth

Growth on the 'leakages side' can occur as a result of a fall in savings, in tax levels, and in the value of import spending.

Growth using the cross diagram

Recession

Recession, which usually means at least two consecutive reductions in real GDP, occurs when there are sustained decreases in real GDP. Recession can follow a fall in either consumption or injections, or when leakages increase. Recessions are likely to reduce standards of living, and increase unemployment and poverty.

Recession through a fall in injections

Recession can follow a reduction in corporate investment, government spending, or through a fall in export sales, or as a result of a rise in savings, higher tax levels, or an increase in import spending.

recession shown through the injections diagram

Recession through an increase in leakages

recession shown through the leakags diagram
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