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Economic Growth (Chapter 10) ((-ve economic growth) Economic recession:…
Economic Growth (Chapter 10)
(-ve economic growth) Economic recession: sustained period of negative economic growth
Loss of output and welfare
Increased unemployment
Strain on government budget
Negative outlook and pessimism
May cause deflationary spiral
Policies to encourage economic growth
Fiscal policy: fiscal incentives/disincentives affect savings rate, stimulate changes in domestic and foreign investment levels, R&D and level of government expenditure to develop economic and social infrastructure
Monetary policy: promote growth by influencing the interest rates/money supply to encourage investment in capital goods and new technology
Supply-side policies: development of human capital, infrastructure and R&D
Actual growth: percentage annual increase in national output actually produced or equilibrium national income, i.e., rate of growth in actual or real output
Factors affecting actual growth:
Increased AD
Increased SRAS
Indicators:
Real GDP growth rates
Potential growth: rate of growth of potential output (full-employment output)
Factors affecting potential growth:
Increased LRAS and productive capacity
Sustainable economic growth: rate of growth that can be maintained in the long term without creating other significant economic problems
Benefits of economic growth
Increased consumption, leading to higher SOL
Helps avoid other macro problems
Enables easier redistribution of incomes
Society can afford to care more for the environment
Costs of economic growth
Current opportunity cost of growth: resources diverted away from producing consumer goods towards producing capital goods
Environmental costs and depletion of non-renewable resources: negative externalities
Effects on employment: jobs may be replaced by machines, leading to structural unemployment
Social effects: materialistic society, stress, selfishness, less caring
Impact on BOP
Inclusive economic growth: benefits of the economic growth are fairly distributed among the people
Indicators:
Growth and development (e.g., GDP per capita, labour productivity, employment)
Inclusion (e.g., median household income, poverty rate, income and wealth Gini)
Intergenerational equity and sustainability (e.g., adjusted net savings, public indebtedness as a share of GDP)
Economic development: economic growth accompanied by the qualitative improvement in SOL
Indicators:
Economic: CHANGE in real GDP per capita
Non-economic: other indicators that measure non-material SOL (e.g., HDI)
Causes of economic growth
Supply-side factors: increased productive capacity of the economy (QQT)
Quantity of factors of production
Increase in labour force: caused by increase in participation rate and/or increase in working age population
Increase in availability of natural resources (rather limited)
Increase in capital stock: caused by higher investment (note: there needs to be positive net investment, whereby investment > depreciation
Quality of factors of production
Increase in labour productivity: output per hour of work per worker, can be due to improvements in education, skills and health of the workforce, improvements in technology (e.g., Continuous Education and Training in Singapore)
Increase in land productivity: better utlisation of existing land area (e.g., building of new housing estate in Tengah forest)
Increase in capital efficiency: improvements in technology
Improvements in technology (invention and innovation)
Demand-side factors: affect actual growth and potential growth
Structural factors: favourable cultural, social and political environment (e.g., 2018: SINGAPORE has retained its No 2 spot on the latest World Bank rankings for ease of doing business, coming after New Zealand for the third straight year)
External factors: relative rate of growth of trading partners