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Chapter 10: Economic Growth - Coggle Diagram
Chapter 10: Economic Growth
Types of recession
Economic recession
Technical recession
Effects
Strain on government budget due to
fall in tax revenue and increase in transfer payments
Negative outlook
Households reduce consumption and save more, firms reduce investment -> AD fall -> GPL falls and output falls further
Deflationary spiral
Fall in MSOL due to
Loss of output -> fall in amt of goods and services available for consumption
Unemployment -> income of households fall -> lower PP -> lower ability to consume goods and services
Economic growth
Potential growth (PG): rate of growth in potential output
determined by increase in LRAS (leftward shift), represented by outward shift of PPC
when one exceeds the other
AG > PG leads to output produced to approach full-employment output, may result in inflation
AG < PG leads to increase in unemployment and spare capacity
Inclusive growth: creates opportunity for whole population with benefits of economic growth distributes fairly across society
measured using
Inclusion eg. Income Gini
Growth and Development eg. GDP per capita
Intergenerational equity and sustainability (for reason that growth and increase SOL are not truly socially inclusive) eg. Adjusted net savings
Actual growth (AG): rate of growth in real output
determined by increase in AD (leftward shift) or SRAS (downward shift), represented by outward movement of production point in PPC
measured by percentage change in real GDP
real GDP = (nominal GDP/ GDP deflator) x 100
Causes
Demand-side factors
Increase in C -> incentive for firms to invest in tech -> AD increases -> actual growth
Supply-side factors (QQT)
Increase in quality of FOD
Land productivity eg. terracing hill slopes
Capital efficiency through technological advancement
Labour productivity eg. Continuous Education Training (CET)
Increase in technology of FOD
Applying new techniques to existing production processes
Improvement to design and performance of capital
Increase in quantity of FOD
Labour force
Capital stock (investment in physical capital and infrastructure)
Availability of natural resources
Structural factors
Legal institutions to protect private property rights -> incentive to work hard and accumulate wealth
External factors
Rate of growth of trading partners affect amt of exports a country can sell them
Economic development
economic growth + qualitative improvement in SOL
measured by economic (change in real GDP per capita) and non-economic indicators (HDI, MEW, PQLI)
Policies
Monetary policy
Interest rate policy (lower cost of borrowing -> higher rates of return for firms and incentive for households to borrow on credit)
Exchange rate policy (imports become relatively expensive while exports become relatively cheaper -> demand for foreign imports fall while demand for domestic exports increases)
AS-policies
Development of infrastructure
Development of R&D
Development of human capital
Fiscal policy
Fiscal incentives/discentives eg. tax cocessions that encourage private domestic and foreign investments
Level of government expenditure eg. government spending on public goods, investment in human capital, infrastructure that stimulates higher investments
Consequences
Benefits
avoid unemployment and inflation
reduce income inequality -> more inclusive growth
higher real income per head -> higher C -> higher MSOL
more environment regulation as countries become developed -> sustained growth
Costs
greater income inequality due to wages increasing at different proportions for expanding and declining industries
higher consumption level -> higher pollution level and run out of non-renewable resources more rapidly
resources diverted away from production of consumption goods to capital goods -> opportunity cost of higher growth in SR < current consumption
structural unemployment
fall in NMSOL due to increasing stress and anxiety levels of individuals
Balance of Payment current account deficit due to investment in import machinery