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CH 10: Economic growth - Coggle Diagram
CH 10: Economic growth
economic recession: defined as a sustained period of negative economic growth
technical recession: defined as two consecutive quarters of negative growth
(a) loss of output and welfare
- fall in economic output
- fall in available goods and services for consumption
- fall in material SOL
(b) increased unemployment
- output fall
- requirement of labour fall
- unemployment increase
(c) strain on government budgets
- unemployment increase
- income decrease
- tax revenue of gov decrease
- the amount of transfer payment (such as unemployment benefits and social welfare) from gov increase
- strain on gov budget
(d) negative outlook and pessimism
- prolonged fall in output
- lack of confidence in the economy recovering could result in households and firms saving more and investing less
- further fall in economic output
(e) may cause deflationary spiral
- fall in general price due to falling AD
- households and firms will expect the prices to fall further, withhold spending to purchase goods at a later time at lower prices
- further fall in output and incomes as well as general price levels, causing a deflationary spiral
economic growth: defined as an increase in the real national output of a country over a period of time
sustainable growth: is defined as the rate of growth that can be maintained in the long term without creating other significant economic problems (such as depletion of resources and environmental problems), particularly for future generations. it implies a positive and stable growth rate over an extended period of time
actual growth: the percentage annual increase in national output produced or equilibrium national income: the rate of growth in actual or real output.
Determined by the growth in AD and/or the increase in SRAS
AD = C + I + G + (X-M)
- a rapid rise in AD will create an unplanned fall in stocks, stimulating firms to increase production and hence increase output
- reduce slack in the economy in terms of unused resources
- faster the rise in AD, the higher the short-run rate of actual growth
- economic boom
- a reduction in AD will leave firms with unplanned increased stocks of unsold goods
- firms tend to reduce production and output
- recession
- increase in SRAS (due to a fall in COP) results in excess output at the current price level
- price level to fall
- increase the purchasing power of households and leads to an increase in spending on goods and services
- movement along the AD
- actual growth
however, without an increase in productive capacity, a rise in actual growth must eventually come to end
potential growth is the rate of growth of potential output (or full-employment output)
- the speed at which the economy could grow
- the percentage annual increase in the capacity of the economy to produce
- determined by the increase in LRAS i.e. increase in productive capacity
- in the long run, defined by supply-side factors - lead to expansion of the PPF (outward shift of the PPF)
(actual growth is represented by the movement outward of the production point, from within the line onto the line)
actual growth rate exceeding potential growth rate
- the amount of idle resources and unemployment is reduced
- inflationary pressures build up, mainly 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 toward potential growth
potential growth rate exceeding actual growth rate
- there will be an increase in spare capacity and an increasing unemployment
- there will be a growing gap between potential and actual output
inclusive growth
- is economic growth that creates the opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society
- enable ppl to fulfil their potential and in doing so, the potential of the economy they are part of will be enhanced
- connecting ppl up with the opportunities in the labour market through better education, transport and employment
- minimized unequal distribution of income, increase social mobility and take full advantage of their human capital
- drive innovation, creativity and productivity, be a more dynamic, socially mobile labour market, more effective education system
- ultimate goal: broad-based and sustained progress in living standard
- poverty can generate a vicious cycle, whereby ppl are not motivated to invest in their education, skills and careers if they perceive their job prospects to be low-paid and dead-end jobs
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economic development
- a more comprehensive concept and is defined as economic growth accompanied by the qualitative improvement in the SOL
(economic growth被包含在内)
- could be reflected as a shift in the occupational structure of the labour force towards jobs that require better education and higher skills
- alleviates poverty, inequality and unemployment
- for economic development to occur, the economic growth should be inclusive so that there is an overall improvement in the SOL of the population in general
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policies to encourage desirable rates of economic growth
- to achieve a sustained rate of economic growth that is generally positive, stable and non-inflationary
fiscal policy
1. fiscal incentives or disincentives to affect savings rate, stimulate changes in domestic and foreign investment levels, research and development
- level of government expenditue to develop economic and social infrastructure
a. policies to encourage investment
- tax concessions to encourage private domestic and foreign investments
- government expenditure to build infrastructure - increase productivity, allow a higher return on investment and leads to more investment
b. policies to encourage technological improvements
- educational facilities, increase accessibility to education
- tax incentive to encourage foreign investment which bring along new technologies and managerial practices
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AS side policies
promote growth
- the development of human capital through education and through the training and retraining of skills
- development of infrastructure
- development of R&D resulting in technological process
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