Economic Growth
inclusive growth
Definition
increase in the real national output of a country over a period of time
Sustainable Growth
rate of growth that can be maintained in the long term without creating other significant economic problems. Implies a positive and stable growth rate over an extended period of time
major issues
SR issue of how to keep actual growth as close as possible to potential output
LR issue of what determines the rate of potential economic growth
actual growth
percentage annual increase in national output actually produced or equilibrium national income.
potential growth
rate of growth of potential output( the speed at which the economy could grow). ; percentage annual increase in the capacity of the economy to produce.
potential growth > actual growth
amount of idle resources and unemployment reduced
inflationary pressure builds up
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
actual growth > potential growth
increase in spare capacity
increase in unemployment
growing gap between potential and actual output
economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity across society
measurement
growth and development
inclusion
intergenerational equity and sustainability
GDP per capita
Labour productivity
employment
healthy-life expectancy
median household incomes
poverty rate
income Gini
wealth Gini
adjusted net saving
public indebtedness
dependency ratio/ proportion of retirees and youth to working-age population
carbon intensity of economic output
Economic development
Economic growth accompanied by the qualitative improvement in SOL
Economic growth vs economic development
economic growth
economic development
sustained increase in output of goods and services
sustained increase in output of goods and services + multi-dimensional improvement in SOL
quantitative , measured by rate of change of GDP
quantitative + qualitative
may not be inclusive, economic growth may only benefit the rich ( minority )
inclusive growth, overall improvement in SOL of popuulation
Possible to have growth without development
must have growth before development can be said to have taken place
can be shown as outward movement of a point inside PPF or outward shift of PPF
cannot be shown diagrammatically
measured by
percentage changes in real GDP
measured by
economic indicators
real GDP per capita
population demographics
poverty and income distribution
labour and employment
inflation
extent of external trade
external debt
savings
military expenditure
rate of urbanisation
non-economic indicators
Physical quality of life index(PQLI)
Measure of Economic Welfare(MEW)
Human Development Index(HDI)
causes
supply-side factors
increase in quantity of factors of production
increase in labour force
growth in labour force will lead to an increase in potential output
increase in availability of natural resources
increase in capital stock: investment in physical capital and economic infrastructure
increase in quality of factors of production
increase in labour productivity
increase in land productivity
increase in capital efficiency
increase in level of technolody
demand side factors
structural factors
external factors
affects actual growth in SR
affect economy's productive capacity in the LR
favourable cultural, social and political environment would promote growth.
when property rights are enforced, there will be an incentive to work hard and accumulate wealth.
international trade opens up markets for exporters and enables exporting firms to enjoy economies of scale. If trading partners have slow growth, amount of exports a country can sell to them will grow slowly and this limits the country's opportunity for investment and growth
policies to encourage desirable rates of economic growth
fiscal policy
monetary policy
aggregate supply side policies
development of human capital through education and through training and retraining of skills
development of infrastructure
development of R&D --> technological progress
fiscal incentives
level of government expenditure to develop economic and social infrastructure
tax concessions
tax incentives to encourage foreign investment
tax incentives to encourage R&D
building of infrastructure
human capital
provide greater educational facilities
influencing interest rates/money supply to encourage investment in capital gods and new technology
influencing exchange rates to affect balance of trade
changes to AD
Consequences
benefits
costs
increase levels of consumption --> higher SOL
economic growth > population growth, higher real income per head. This can lead to higher levels of consumption of goods and services
helps avoid other macro problems
enables easier redistribution of incomes
incomes rise, govt can redistribute incomes from rich to poor as people automatically pay more taxes ( tax rates remain unchanged ). Extra revenues can be spent to alleviate poverty
society can afford to care more for the environment
worker's demands for higher wages are likely to lead to higher inflation etc. Growth in productive potential helps to meet these aspirations and avoids other macro problems that may arise
people become less preoccupied with their own private consumption and more concerned to live in a clean environment as affluence rises
opportunity cost of growth
firms will need to invest more to achieve faster growth. these will take away resources from production of consumer goods to production of capital goods
environmental costs and depletion of non-renewable resources.
higher level of consumption --> higher level of production --> higher level of pollution
if growth involves using greater amount of resources rather than using same amount of resources more efficiently, some non-renewable resources may run out more rapidly
effect on income re-distribution
wages and salaries paid to workers in different industries will increase at different rates.
individuals with more sources of income may experience a greater rise in incomes, thus as the rich are likely to have multiple sources of income, the rich get richer
effect on employment
more rapid rate of growth --> more rapid rate of change in production techniques. skills may then no longer be relevant or jobs maybe replaced by machines. thus increased unemployment
social effects
increased stress and anxiety level of individuals, excessive pursuit of material growth can lead to greedier, more selfish and less caring society
impact on BOP
if investment undertaken growth involves purchasing imported machinery.
rising incomes due to economic growth may lead to increased purchases by households on imported consumer goods
developing countries dependent on FDI for economic growth may experience a BOP financial account deficit when foreign capital funds flow in, as these represent increase in liabilities
LT, part of the profits generated from FDI will also be repatriated back to foreign shareholders, leading to worsening of current account of BOP
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