CHAPTER 7: GROWTH STRATEGY
Classical theory
Keynesian Revolution
Laissez-Faire Economics (Adam Smith 1723-1790)
government intervention can only be detrimental
government spending is not a major market force
creating long term solution
supply creates its own demand
market is imperfect and not self sustaining
government spending to jumpstart growth
government policy can influence demand
short term
consumer income stimulates demand
Economic Growth
the process of increasing the economy's ability to produce goods and services, can be achieved by increasing the quantity or quality of resources
Human Resources
Natural Resources
Capital Reformation
Technological Change and Innovation
size of labour force
quality of work force
oil and gas
agriculture and fisheries
equipment and factories
social overhead capital
quality of scientific and engineering
managerial know-how
Fiscal Policy
government adjusts its spending levels and tax rates to monitor and influence a nation's economy
expansionary fiscal policy
contractionary fiscal policy
cut tax rates or increase government spending
raises tax rates or cuts government spending
Federal deficit
Monetary Policy
how central bank manage liquidity to create economic growth
contractionary monetary policy
reduce inflation
expansionary monetary policy
lower unemployment and avoid recession
expenses incurred by the government are over and above the tax revenues (Federal Debt)
Federal surplus
government revenues exceed government spending
National debt
result of federal government borrowing money to cover years and years of budget deficits
Reasons of importance
Interest costs are growing rapidly
Key investments in our future are at risk
Rising debt means lower incomes
Less flexibility to respond to crisis
Protecting the essential safety net
The sooner we act, the easier the path
Measuring National Income
Expenditure method
GDP=C+I+G+(X-M)
Income method
GDP = Wages + Profit + Rent Income
Product method
GDP = Value of production - value of intermediate goods
Difficulties faced in computation of national income
Types of Goods and Services
Problems of Double Counting
Illegal Activities
Depreciation
Why is National Income important
Economic policy
Economic planning
Economy's structure
Inflationary and deflationary gaps
Budgetary policies
National expenditure