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economic growth: increase in real national output of a country over a…
economic growth: increase in real national output of a country over a period of time
sustainable growth: rate of growth that can be maintained in a long period of time without creating other economic problems for the future generations; positive and stable growth rate
2 major issues: short run: how to keep actual growth as close to potential output ;
long run: what determines rate of potential economic growth
actual growth: percentage annual increase in national output actually produced.
-represented by movement outwards of the production point in PPC
-without expansion in productive capacity, growth comes to an end.
-rise in SRAS results in excess output and price falls, increased demand of goods, actual growth
-economic boom to recession and back is the business cycle.
-reduction in AD causes unplanned rise in stocks, decrease production, recession.
-rise in AD creates an unplanned fall in stocks, increase production, reduce slack in economy, economic boom
short run: determined by growth in AD and/or increase in SRAS
potential growth: rate of growth of potential output (or full employment output), determined by increase in LRAS
-long run: determined by supply side factors
-represented by an outward shift of PPC
-for actual growth to be sustained, potential growth also has to grow
when actual growth rate exceeds potential growth rate:
-amt of idle resources and unemployment is reduced
-inflationary pressures build up through higher wages
-excess labour demand leads to real wage growth outstripping productivity productivity growth
-unit labour costs increase, causing erosion of export competitiveness
-GDP growth moderates towards potential growth
when potential growth rate exceeds actual growth rate
-increase in spare capacity, increase in unemployment
-growing gap between potential and actual output
broader concept: inclusive growth: economic growth that creates opportunities for all segments of the population and distributes the dividends of increased prosperity (monetary and non-monetary) fairly across society
enhances economy potential
countries with unequal income distribution have lower levels of social mobility and fails to take advantage of their human capital
indicators of inclusive development
growth and development: GDP per capita, labor productivity, employment, life expectancy
inclusion: median household income, poverty rate, income gini, wealth gini
intergenerational equity and sustainability: adjusted net saving, public indebtedness as a share of GDP, dependency ratio or proportion of retirees and youth to working population, carbon intensity
measured by percentage change in real GDP
nominal GDP is not suitable as it can rise even if the quality falls
national output or GDP is measured in constant dollars to eliminate the effects of rising prices to obtain real growth.
real GDP (of year z) = (nominal GDP of year z divided by GDP deflator) x 100
growth rate is one of the most important features of economic growth, even a small percentage can affect the economic growth significantly
economic growth is a continuing (exponential
process)
causes
supply side factors
increase in quantity of FOP (increase in labour forces, increase in availability of natural resources, increase in capital stock)
increase in quality of FOP (increase in labour productivity eg SGUNITED job and skills package, increase in land productivity, increase in capital efficiency)
increase in level of technology (depends on supply of scientists and engineers, environment for R&D)
demand side factors (short run, affect actual growth, long run affects productive capacity)
structural factors (favourable cultural, social, 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
consequences (costs and benefits)
benefits
increased levels of consumption leading to higher standards of living
helps avoid other macroeconomic problems, aka reducing inflation due to requests for higher wages, reducing unemployments
easier redistribution of incomes, they automatically pay more taxes due to higher income and the government can use the extra revenue to alleviate poverty
society can afford to care for the environment
costs
current opportunity cost of growth
environmental costs and depletion of non-renewable resources
income distribution: the increase in wages tend to increases at different rates (the rich get richer, the poor get poorer)
many skills are no longer relevant, jobs replaced by machines, unemployment
societal effects: greedier society, more violence, crime, loneliness, stress, suicides, divorces