Macroeconomics: Economic Growth (Benefits of economic growth: (Improved…
Macroeconomics: Economic Growth
The rate of economic growth
: Measures the annual / quarterly % change in real GDP
Sustainable economic growth:
Requires economic growth to be maintained for a long period. It involves low inflationary growth and growth that is environmentally sustainable.
An increase in real GDP. It refers to an increase in the total value of goods and services produced in an economy.
Two consecutive quarters of negative growth
Benefits of economic growth:
Improved government finances.
Economic growth creates higher tax revenues and there is less need to spend money on benefits such as unemployment benefit.Economic growth can reduce debt to GDP.
Improved public services.
With increased tax revenues the government can spend more on the health care and education
Economic growth encourages firms to employ more workers creating more employment
Protecting the environment.
With higher real GDP a society can devote more resources to promoting recycling and the use of renewable resources.
Rising real GDP enables consumers to enjoy more goods and services and enjoy better standards of living
Costs of economic growth:
Boom and bust cycles.
If economic growth is too fast and unsustainable, it can lead to boom and bust cycles
. Higher growth can lead to more pollution and environmental degradation. It can also lead to more pollution.
If growth is too fast, it may lead to inflation
Growth can lead to the diminishing of natural resources.
Causes of economic growth:
Increasing disposable income
Higher confidence in the economy
: Encouraging spending and investment
Rising house prices:
Leading to a positive wealth effect, encouraging consumer spending
From higher growth in other countries
Lower interest rates
: reducing the cost of borrowing and leading to higher investments and higher consumption
Better education and training to increase labour productivity
Improvement in technology, leading to lower costs of production
Increased investment in productivity capacity
Improvement in infrastructure, such as transport
Inward investment from overseas multinational firms
Net migration causing a rise in the labour supply
The multiplier effect occurs when a change in injections causes a bigger final change in real GDP
Multiplier (K) = Change in real GDP (Y) / Change in injections (J)
The multiplier effect will be bigger if consumers spend a high % of their income. However, if confidence is low and people save the extra income, the multiplier will be low
The multiplier effect will also be lower if most of the spending goes on imports, because this is a leakage from the economy.
Multiplier (K) = 1 / (1-MPC) = 1 / MPW)
MPC = Marginal propensity to consume, the % of extra income that is spent. MPW = Marginal propensity to withdraw
Factors that determine long run trend rate:
Size of labour force
Supply side improvements
Efficiency gains from policies