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Chapter 10: economic growth (Economic growth, inclusive growth and…
Chapter 10: economic growth
Economic growth, inclusive growth and economic development
Economic growth
Defined as an increase in the real national output of a country over a period of time
Government seek to achieve sustainable growth
The rate of growth that can be maintained in the long term without creating other significant economic problems, particularly for future generations
Two major issues concerned
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
The percentage annual increase in national output actually produced or equilibrium
Rate of growth in real output
In SR it’s determined by the growth in AD and/or the increase in SRAS
insufficient to ensure a continuing high level of growth over a number of years as the economy reaches full employment level
for actual growth to be sustained over time, potential output must also grow
represented by a movement outwards of the production point
Potential growth
Rate of growth of potential output or full employment output
Actual growth rate exceeding potential growth rate
amount of idle resources and unemployment is reduced
inflationary pressures build up <- higher wages
excess labour demand leads to real wage growth outstripping productivity growth
unit labour costs increase -> erosion of export competitiveness
GDP growth moderates towards potential growth
Potential growth rate exceeding actual growth rate
increase in spare capacity
growing gap between potential and actual output
Inclusive growth
economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary terms, fairly across society
economic growth may only benefit certain part of the population
Measurement
Growth and Development
GDP per capita
labour productivity
employment
healthy-life expectancy
Inclusion
median household income
poverty rate
income gini
wealth gini
Inter-generational Equity and Sustainability
adjusted net saving
measures the true rate of saving in an economy after taking into account investments in human capital, depletion of natural resources, and damage caused by pollution
public indebtedness as a share of GDP
roughly illustrates the scale of borrowing by the current generation against the capacities of future ones
the dependency ratio
leading indicator of likely future pressure on a nation's finance
carbon intensity of economic output
indicator of the country's relative performance on climate change
Economic development
economic growth accompanied by the qualitative improvement in the SOL
alleviates poverty, inequality and unemployment within the context of growing economy
a shift in the occupational structure of the labour force towards jobs that require better education and higher skills
Economic growth vs. Economic development
Economic growth(quantitative) can be a subset of economic development(qualitative & quantitative)
Measurement of growth and development
economic growth
Real GDP
economic development
economic indicators
real GDP per capita
takes into account all output produced in the economy and converts them into a single measure using market prices
fail to include non-marketed subsistence production and to incorporate welfare and income distribution concerns
population demographics, poverty & income distribution, labour and employment, inflation, extent of external trade, external debt, saving, military expenditure, rate of urbanisation etc.
non-economic indicators
Physical Quality of Life Index(PQLI)
Measure of Economic Welfare(MEW)
Human Development Index(HDI)
Causes of Economic Growth
Supply factors
Increase in quantity
Increase in labour force
growth in labour force, increase in potential output
increase in working age population, inflows of migrants, increase in participation rate
Increase in availability of natural resources
discovery of new minerals or fishing grounds, expansion of a country's territory
Increase in capital stock
vital in the production processes
there must be positive net investment
rate of investment depends on
level of savings
expected returns in the future from the use of the capital
rate of interest
government policy in terms of tax policy, expenditure and direction given
Increase in quality
increase in labour productivity
output per hour of work per worker
may rise a result of improvements in education, skills and health of the workforce or improvements in technology
increase in land productivity
better utilisation of existing land area like terracing of hill slopes for the cultivation of rice fields
increase capital efficiency
through the use of innovative techniques as well as technological advancement
Technological advancement
discoveries of new knowledge
permits the combining of a given amount of resources in new ways so as to result in a larger output
can be improvement in management techniques
rate of technological progress depends on
supply of scientists and engineers
environment for research and development
Demand factors
will not directly increase the productive capacity
affect actual growth in the short run
without increases in AD -> actual output may not rise as fast as the increase in productive capacity
higher production potential created by supply factors cannot be actualised if it is not purchased by the 4 sectors of the economy
gap between potential and actual output widens
Structural factors
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
External Factors
international trade opens up markets for exporters and enables exporting firms to enjoy economies of scale
if trading partners have slow growth, the amount of exports will grow slowly and this limits the country's opportunities for investment and growth
Policies to encourage desirable rates of economic growth
Fiscal policy
Policies to encourage investment
policies to encourage technological improvements
Monetary policy
influencing interest rate
encourage investment in capital goods and new technology
influence exchange rate
affect balance of trade
Aggregate supply side policy
development of human capital through education and through the training and retraining of skills
development of infrastructure
development of R&D resulting technological progress
Consequences of economic growth on the economy
Benefits
increased levels of consumption leading to higher standards of living
higher income per head
higher levels of consumption
helps avoid other macroeconomic problems
without growth in productive potential,workers' demands for higher wages are likely to lead to higher inflation, BOP problems
enables easier redistribution of incomes
if Y increases, govt. can redistribute incomes from the rich to the poor
as they pay more taxes even if tax rates doesn't change
extra revenue for govt. to spend
society can afford to care more for the environment
as affluence rise, ppl can be more concerned to live in a clean environment
Costs
current opportunity cost of growth
more is invested to acquire capital goods
resources diverted from producing consumer goods
environmental costs and depletion of non-renewable resources
effects on income re-distribution
some are likely to lose SOL
effects on employment
rapid rate of change in production techniques
ppl may find their skills no longer relevant or jobs replaced by machines
structurally unemployed
social effects
changes to our way of life
increasing stress and anxiety levels
impact on Balance of Payments
may cause of BOP current account deficit if the investment undertaken to achieve growth involves purchasing imported machinery