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Chapter 10 Economic Growth (Effects of recession (Increased unemployment,…
Chapter 10 Economic Growth
Effects of recession
Increased unemployment
Strain on government budgets
Loss of output + welfare
Negative outlook and pessimism
Cause deflationary spiral
Types of growth
Economic growth (Increase in real national output of a country)
Actual Growth
Percentage annual increase in national output actually produced.
Determined by rise in AD and SRAS - Shift in Real National output to the right
Potential Growth
Percentage annual increase in the capacity of economy to produce
Determined by increase in productive capacity or LRAS
Actual growth rate > Potential Growth rate
Amount of idle resources and unemployment reduced
Inflationary pressure builds up, through higher wages
Excess labour demand leads to real wage growth outstripping productivity growth
Unit labour costs increase, leading to an erosion of export competitiveness
GDP growth moderates towards potential growth
Potential growth rate > Actual Growth rate
Growing gap between potential and actual output
Increase in spare capacity and unemployment
Measurement
Percentage change in real GDP Real GDP of year z = (Nominal GDP/GDP Deflator )* 100
Inclusive growth
Benefits of economic growth are fairly distributed among the people such that no particular segments of the population are excluded from the benefits
Objective: Broad based and sustained progress in living standards, concept that encompasses wage and non wage income, economic opportunity, security and quality of life
Measurement of inclusive development
Growth and development
Inclusion
Intergenerational Equity and Sustainablity
Economic development
Economic growth + Qualitative improvement in standard of living
Measurement
Economic indicators
Change in real GDP per capita
Population demographics
Poverty & income distribution
Non-economic indicators
Physical Quality of Life Index
Measure of Economic Welfare
Human Development Index
Causes of Economic growth
Supply Side factors
Quantity of Factors of Production
Increase in labour force
Increase in availability of natural resources
Increase in capital stock
Quality of Factors of Production
Increase in labour productivity
Increase in land productivity
Increase in capital efficiency
Increase in level of technology
Demand Side factors
In short run, actual growth increases
In the long run, indirectly affect the economy's productive capacity.
Structural factors
Favourable cultural, social and political environment would promote growth
Legal institutions needed to provided law and order and enforce contracts between parties of economic transcations and protect private property rights. When property rights are enforced, there will be an incentive to work hard and accumulate wealth.
External factors
International trade opens up markets for exporters and neables exporting firms to enjoy economics of scale. The rate of growth of the rest of the world is important to a country with a large foreign trade sector.
Policies to encourage desirable rates of economic growth
Fiscal policy
Policies to encourage investment:
Tax concessions to encourage private domestic and foreign investments
Government expenditure to build infrastructures
Policies to encourage technological improvements
Government expenditure to provide greater educational facilities
Tax incentives to encourage foreign investments
Tax incentives to encourage research and development
Monetary policy
Influencing interest rates or money supply to encourage investment in capital goods and new technology.
Influencing exchange rates to affect the balance of trade
Consequences of Economic Growth
Benefits of economic growth
Increased consumption -> Higher standards of living
Avoid other macroeconomic problems such as inflation, balance of payments, industrial disputes.
Enables easier redistribution of incomes through government expenditure.
Society can afford to care more for the environment
Costs of economic growth
Opportunity costs of growth: More investment in capital goods. Less production of consumer goods
Environemtnal costs and depletion of non-renewable resources
Rise in income inequality
Increase in structural unemployment
Increase in stress and anxiety of overworked consumers
Increase in Balance of Payment account deficit
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