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Chapter 7: Macroeconomic Objective of Economic Growth - Coggle Diagram
Chapter 7: Macroeconomic Objective of
Economic Growth
Economic growth: increase in
real national output
of a country over a period of time
SUSTAINABLE
economic growth: growth maintained in the long term (sustained EG) -> achieved by both
potential economic growth (PEG)
and
actual economic growth (AEG)
, without excessively depleting natural resources
Causes of economic growth
Demand: AD=C+I+G+(X-M)
Supply
SRAS: e.g COP
LRAS: QQT
Quality: Labour productivity, land productivity, capital efficiency
Quantity: Labour force, natural resources, capital stock
Technology: Automation (machinery), management techniques (lower stock of inventory)
Inclusive Economic Growth: Growth creating opportunities for the whole population, distributing benefits of increase prosperity fairly across the country.
Everyone can benefit, and the benefits are shared equitably.
Unequal distribution of income: lower levels of social mobility (fail to take advantage of human capital).
Effects of Economic Growth
Benefits
Higher material SOL
(increased leisure time and consumption) due to more goods and services produced
Avoids macro problems
of inflation and unemployment (use of unemployed resources, and PEG causes price not to rise as much as compared to if economy did not have PEG)
Income equality
: AEG causes incomes to rise, govt can redistribute income to poor through the paying of more taxes to spend on poverty-alleviating programmes, allowing for increased equity
Sustainable growth
: provides monetary ability for cleaning up env problems + research safer/cleaner methods
Costs
Opportunity cost of growth
: investing and acquiring capital goods diverts money away from producing consumer goods to purchasing capital goods. -> less current consumption (like producing factories for future use instead of crops at present)
Environmental costs
: Higher consumption level -> higher pollution levels -> shortages of non-renewable sources for the future gen
Income distribution
: wages and salaries rise at different rates (compare expanding vs declining industries) -> greater income inequity (from wage gaps or unemployment from declining industries)
Employment
: Growth -> rapid change in production techniques, skills no longer relevant -> unemployed/taking low-end jobs
Non-material SOL
: must work longer/harder with AD increasing, less leisure time
Possible balance of trade (BOT) deficit, where M>X
AEG: % annual increase in real national output produced.
Short run
: determined by growth in aggregate demand (AD), where AD=C+I+G+(X-M)
Rapid rise in AD -> unplanned fall in stocks -> firms increase production -> more FOP employed -> increased output -> supply increase
Can also be seen by increase in SRAS (excess output, GPL falls, increase in PP, more G&S consumed, AD also increase)
PEG: rate of growth of potential output
Determined by increase in LRAS (LRAS shifts right so full employment Yf increases)
Recession: sustained period of
negative
EG (considered technical after 2 conseq quarters of negative growth)
Loss of output and welfare
: decrease in mSOL (g&s avail decreases)
Increased unemployment
: less labour to produce reduced output
Govt budget strain
Pessimism
: save more, invest less respectively (fall in econ output)
Deflationary spiral
: price decrease, withheld spending, further fall in output
Sustained economic growth: national output is
increasing over a period of time
. requires
BOTH
AEG and PEG.
When AD increases to cut LRAS at classical range (i.e Yf), growth cannot be sustained. When LRAS also increases (Yf increases), and then the economy can continue to achieve AEG.