3.5 - economic growth,, short and long term, PPC

economic growth

increase in real GDP/ real quantity of goods and services produced over a period of time

measures of economic growth

• % change in rGDP over time

• % change in rGDP per capita over time (*better indicator of standard of living)

formula for %change in rGDP per capita

%change in rGDP per capita = (%change in rGDP) - (%change in population)

causes of growth

• increase in AD *short-term

• increase in SRAS *short-term

• increase in LRAS *long-term

short term growth through increase in AD

monetarist:

• increase in rGDP

• no increase in potential output

  • no LRAS curve shift

Keynesian:

• increase in rGDP

• no increase in potential output

  • no AS curve shift

short run growth through increase in SRAS

• less often way of growth

  • increase in rGDP

  • no increase in potential output

    • no LRAS curve shift

• moved by

  • fall in prices of factors of production

  • increase in subsidies

  • positive supply shocks

long term growth monetarist + Keynesian

due to

• increase in quantity

• increase in quality of factors of production

• technological improvements

• efficiency improvements

• institutional changes

changes in macroeconomic equilibrium over long-term

due to

• shifts in aggregate supply and demand

• changes in productivity

• adjustments in policy measures that enhance economic capacity

production possibilities curve (PPC) model

maximum output that can be produced by an economy with fixed resources and technology

• given maximum employment of resources and efficiency in production

ways of moving closer to the PPC

• reduced unemployment

• improving the efficiency of resource use

short-term growth on the PPC

• reduction in unemployment

• improvement in efficiency

*limited amount of economic growth (only A → B)

long- term growth on PPC

• growth in production possibilities (PPC₁ → PPC₂ → PPC₃)

• actual growth (A → B → C)

• increase in resource quantities (physical capital, ecological resources)

• improvements in resources quality (physical capital, labor, ecological resources)

• technological change

problem with long-term growth in PPC

• as quantity and quality of resources grow, efforts must be made to

  • ensure sustainable development

  • avoid resource depletion

  in order for the actual output to grow along with production possibilities

negative growth on PPC

• less of the two goods is being produced

  • lower quantity

  • lower quality

factors affecting economic growth

• higher standards of living

• potential environmental degradation

• distribution of income

living standards

levels of income, wealth and consumption

living standards ↑ when rGDP > population growth

factors of living standards that are affected by economic growth

• distribution of income

• household spending

• share of income controlled by women

• government spending on merit goods

potential environmental degradation

rapid growth => unsustainable resource use:

• urban air pollution

• soil degradation

• flooding

• overgrazing

• deforestation

economic growth & environmental sustainability can be pursued when:

• governments implement market-based policies

  • internalize the externalities → correcting them and providing incentives for sustainable resource use

• governmental environmental regulations

• increased emphasis on human capital production over physical capital

• increased emphasis on ‘green’ investments

problem with factors affecting economic growth (living standards, environment, distribution of income)

due to likelihood of two-way causality it is difficult in real world to determine what causes what

…. economic growth → factors affecting → economic growth → ……