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)

• population growth > rGDP growth → negative growth of rGDP per capita

• population growth < rGDP growth → positive growth of rGDP per capita

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

• moved by increase in any of the AD determinants

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

• moved by fall in prices of factors of production

• increase in subsidies

• positive supply shocks

• increase in rGDP

• no increase in potential output

  • no LRAS curve shift

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

shows combinations of maximum output that can be produced by an economy with fixed resources and technology, given maximum employment of resources and efficiency in production

*highly unlikely for an economy to be producing on the PPC

• due to maximum employment of all resources and efficiency not being achievable in real life

• most likely to be producing at a point inside the PPC

measures of moving closer to the PPC & increasing the actual quantity of output

• 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

  • *no clear relationship between growth in GDP per capita and income distribution

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

• contributions by NGOs

potential environmental degradation

rapid growth => unsustainable resource use:

• urban air pollution

• soil degradation

• flooding

• overgrazing

• deforestation

economic growth & environmental sustainability can be pursued when:

can be pursued together given that governments take appropriate measures to ensure maximum rate of growth that is consistent with environmental sustainability

• governments implement market-based policies

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

• governmental environmental regulations that encourage pollution-free technological change

• 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 → ……