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Economic Growth and Development (Economic Growth (Causes (Supply Side…
Economic Growth and Development
Economic Growth
Actual Growth
Percentage annual increase in national output actually produced or equilibrium national income
(rate of growth in actual or real output)
Potential Growth
Percentage annual increase in the capacity of the economy to produce
(rate of growth of potential output (or full-employment output))
Inclusive Growth
Economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society
Measurement
Economic Growth
Percentage change in real GDP
Inclusive Development
Inclusion
Median household income
Poverty rate
Income Gini
Wealth Gini
Growth And Development
GDP per capita
Labour productivity
Employment
Healthy life expectancy
Intergenerational Equity and Sustainability
Adjusted net saving
Public indebtedness as a share of GDP
Dependency ratio or proportion of retirees and youth to the working-age population
Carbon intensity of economic output
Causes
Supply Side Factors
Increase in quantity of FOP
Increase in availability of natural resources
Increase in capital stock
Increase in labour force
Increase in quality of FOP
Increase in labour productivity
Increase in land productivity
Increase in capital efficiency
Improvements in Technology
depends on
Supply of scientists and engineers
Environment for research and development
Demand Side Factors
Affects actual growth in the short run
Affects productive capacity in the longer run, when investment increases due to increased consumption
Structural Factors
Favourable cultural, social, and political environment promotes growth
Legal institutions are needed to provide law and order, enforce contracts, and protect private property rights
When property rights are enforced, there will be an incentive to work hard and accumulate wealth
Farmers who have title deeds to the land they farm are able to use them as collateral to gain access to capital to finance improvement in their farming methods, increasing the rate of economic development.
External Factors
New markets enable exporting firms to enjoy economies of scale
If trading partners have slow growth, the amount of exports a country can sell to them will grow slowly and limit the country's opportunities for investment and growth
Policies
Fiscal
level of government expenditure to develop economic and social infrastructure
building of infrastructure
networks of roads
airports
ports
telecommunications
investment in human capital
schools
training facilities and programmes
health services
Fiscal incentives/disincentives to affect savings rate, simulate changes in domestic and foreign investments levels, research and development
tax concessions
encourage private domestic and foreign investments
tax incentives
increase foreign investment
encourage R&D
Monetary
influencing interest rates/money supply
encourage investment in capital goods and new technology
changes in AD --> actual growth increases as AD is stimulate via multiplier process and potential growth may increase
influencing exchange rates
affect BOT
Aggregate supply side
development of human capital
education
training and retraining of skills
development of infrastructure
development of R&D resulting in technological progress
Consequences
Benefits
Enables easier redistribution of income
if incomes rise, people automatically pay more taxes even though tax rates remain unchanged. These extra revenues can be spent to alleviate poverty
Helps avoid other macro problems
without growth in productive potential, workers' demands for higher wages are likely to lead to higher inflation, BOP problems, industrial disputes etc. Growth in productive potential helps to meet these aspirations and avoid macro problems
Increased levels of consumption leading to higher mSOL
if economic growth > population growth, there will be higher income per head . This can lead to higher levels of consumption of goods and services
Society can afford to care more for the environment
as income rises, people become less preoccupied with own private consumption and more concerned to live in a clean environment
Costs
Environmental costs and depletion of non-renewable resources
richer society is more likely to do more damage to the environment as the higher level of consumption, the higher the level of production. And as a result, the higher the level of pollution.
Current opportunity cost of growth
firms will need to invest more and acquire capital goods to achieve faster growth. Resources must be diverted away from producing consumer goods towards production of capital goods.
Effects on income re-distribution
as an economy grows, wages and salaries paid to workers in different industries will tend to rise at different rates. workers in expanding industries may find that their wages increase by a larger proportion compared to workers in declining industries.
individuals with more sources of income may experience a greater rise in incomes and hence benefit more from economic growth. As the wealthy tend to have more than one source of income, it is likely that the rich get richer, with little or no benefits 'trickling down' to the poor
Effects on employment
the more rapid the rate of growth, the more rapid the rate of change in production techniques. people may then find that their skills are no longer relevant or their jobs may be replaced by machines. Workers may thus find themselves structurally unemployed
Social effects
in addition to increasing stress and anxiety levels of individuals, an excessive pursuit of material growth by a country can lead to a greedier, more selfish and less caring society.
Impact on Balance of Payments
economic growth can cause a BOP CA deficit, if the investment undertaken to achieve growth involves purchasing imported machinery. Furthermore, the rising incomes due to incomes due to economic growth may lead to increased purchases by households on imported consumer goods
Economic Development
A more comprehensive concept and is defined as economic growth accompanied by the qualitative improvement in the standard of living. It involves changes in the economic, social, and political structure of the country.
Measurement
Economic indicators
change in real GDP per capita
Non-economic indicators
Physical Quality of Life Index
Measure of Economic Welfare
Human Development Index