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ECONOMIC GROWTH - Coggle Diagram
ECONOMIC GROWTH
problems of recession:
1) economic recession is definied as a sustained period of negatice economic growth
2) technical recession is defined as two consecutive quarters of the negative growth
strain on govement budgets: increase in unemployment --> income and hence spending of HH fall --> amount of tax revenue fall and transfer payments (unemployment benefits, social welfare assistance) increase --> strain on budget
negative outlook and pessimism: HH and firms' lack of confidence --> choosing in saving more and invest less --> further fall in economy output
increased unemployment: level of output fall --> less labour required to produce reduced amount of output --> increase in unemployment
deflationary spiral: recession accompanied by fall in GPL due to falling AD --> HH and firms expect prices to fall further --> choose to withhold spending to purchase at a later time --> further fall in output and income and GPL --> deflationary spiral
loss of output and welfare: fall in economic output --> amount of G&S available for consumption decreases --> decrease in material SOL
causes
demand side factors: short run affect actual growth, long run indirectly affect productive capacity
without increase in AD --> output may not rise as fast as increase in productive capacity --> higher production potential created by supply factora cannot be actualised
structural side factors: favourable environment promot growth, karge institutions needed to provide law and order to enforece contracts and protect private property rights --> incentive to work hard and accumulate wealth, social structure has fluid mobility and political stability is vital to economic activities
supply side factors
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increase in level of technology: discovery of new knowledge which permits combining a given amount of resources in new ways so as to result in a larger output, techcological advancement includes new techniques applied to existing production process, not limited to factory can be management techniques
rate depends on supply of scientists and environment for R&D
new tech --> new captial investment possibolities --> greater productivity --> change in demand pattern --> encourage more R&D --> further tech improvement
external factors: international trade open up market --> export firms enjoy economies of scale, rate of growth of the rest of the world s important to country with large foreigh trade, if trading partners have slow growth --> amount of exports grow slowly --> limits the country's oppoutunities for investment and growth
economic growth: defined as an increase in the real national output of a country over a period of time
inclusive growth: economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society
measurements:
inclusion: median household income, poverty rate, income Gini, wealth Gini
integenerational equity and sustainability: adjust net saving (measures true rate of saving), public indebtedness, dependency ratio or proportion of retirees and youth to the working age population (indicator of likely future pressure on a nations fiances), carbon intensity of economic output (performance on climate change)
growth and development: GDP percapita, labour productivity, employment, healthy-life expectancy
economic development: a more eomprehensive concept and is defined as economic growth accompanied by the qualitative improvement in the SOL. it involves changes in the economy, social and political structure of the country
in addition to a sustained increase in output of G&S, includes a multidimensional improvements in SOL
includes both quantitative and qualitative dimension
growth is inclusice. resulting in overall improvement in SOL of the populaiton as a whole
there must be growth before developemnt can taken place
cannot be illustrated diagrammatically
sustained growth: defined as rate of growth that can be maintained in the long term without creating other significant economic problems, particularly for future generations. it implies a positive and stable growth rate over an ectended period of time
actual growth: the percentage annual increase in national output actually profuced or equilibrium national income, rate of growth in actual/real output (eg GDP growth rates), in the short run, it is determined by growth in AD and/or increase in SRAS
rapid rise in AD --> unplanned fall in stocks --> stimulating firms to increase production and output --> reduce slack (unused resources) --> the faster the rise in AD, the higher the shirt run rate of actual growth --> rapid rise in AD + high actual growth rate = economic boom
reduction in AD --> unplanned increased stocks of unsold goods --> firms reduce production and output --> reduced AD = recession --> actual growth is low/negative
SRAS increase --> excess output at current price level --> price levels fall --> increase in PP of HH --> increase in spending on G&S --> movement along AD --> increase in eq national output --> actual growth increase
rapid increase in AD and/or SRAS is unsufficient to ensure a continuing high level of growth over a number of years --> rises in actual output will eventually come to an end without expansion in productive capacity --> growth in actual output is restricted to the growth of potential output
potential growth: the percentage annual increase in the capacity of the economy to produce, rate of growth of potential output, determined by increase in LRAS (aka productive capacity)
increase in LRAS --> increase in potential output --> increase in real output (brought by increase in AD + SRAS)
in the long run, potential growth is determined by supply side factors
in PPF, potential growth is outward shift of PPF curve, further increases in output can only be achieved if the potential output of the economy grows
actual growth is movement outwards of production point (inside the PPF curve), SR actual growth can be achieved by better utilisation of existing factors of production
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policies
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fiscal policy (ch13)
to encourage investment: tax concessions to encourage private domestic and foreign investment
govt ecpenditure to build infracstructure --> high return on investment --> higher level of investment
to encourage technological improvements: govt provide greater educational facilities --> necessary supply of scientists, enguneers
tax incentives to encourage investment --> new technologies and managerial practices --> increase local level of tech
consequences
benefits
helps avoid other macroeconomic problems: people have aspirations of rising living standards, growth in productive potential help to meet these aspirations and avoid other macroeconomic problems, actual growth ensures resources are fully and efficiently utilised and reducing problem of unemployment
enable easier redistribution of imcomes: income rise --> govt can redistribute income from rich to poor --> alleviate poverty --> make economic hrowth more inclusive
increased levels of consumption leading to higher standards of living: economic growth --> higher real income --> higher level of consumption --> gain in society
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costs
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effects on employment: more rapid the rate of growth --> more rapid the rate of change in production techniques
environmental costs and depletion of non-renewable resources: higher level of consumption --> greater level of production --> higher level of pollution and waste
social effects: excessive pursuit of material growth --> greedier, more selfish and less caring society
current opportunity cost of growth --> more captial goods are produced at the expendise of consumption goods
impact on balance of payments: BOP current account deficit, rising income due to economic growth lead to increased purchases by households in imported consumer goods
measurement
economic growth is measured by the percentage change in real GDP --> real GDP = nominal (GDP / GDP deflator) x 100
small percentage growth rates have immense absolut effects in the long run, gains made in one year accumulate in future years
economic development
economic indicators: change in real GDP per capita --> reveals amount of a country's output that is potentially available to each person --> takes into account all output produced and convert into a single measure using market prices BUT failed to include non marketed subsistence production and welfare + income distribution concern
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