Unit 5.07_ Understanding Economic Growth

Unit 5.07 Macro Objectives Understanding Economic Growth

Introduction

• Focus on macroeconomic objectives for countries, specifically:

  • Low unemployment

  • Low and stable inflation

  • Economic growth as a third goal that supports the first two.

The Importance of People

• Quote by Peter Drucker:

  • "The ultimate resource in economic development is people. It is people, not capital or raw materials, that develop an economy."

Economic Growth Overview

• Economic growth rates vary over time and by country.

• Periodic fluctuations in economic activity and growth rates are referred to as the business cycle.

• Examples:

  • Emerging economies like China and India show rapid growth.

  • Developed countries typically experience moderate growth rates.

Illustrating Economic Growth

Demand-Side Factors

• Demand-side factors can lead to short-term economic growth.

• Utilizing AD/AS model and PPC model to illustrate growth:

  • Deflationary Gap: Economy operates at point "a" on the PPC.

  • Increase in AD: Shift from AD1 to AD2 can close the gap, increasing real output from Y1 to Y2 (movement from "a" to "b").

  • Employment of previously underemployed resources leads to economic growth by increasing output.

Capacity Limitations

• Point "b" is typically just short of the PPC due to natural unemployment.

• The LRAS curve reflects long-term potential output, not all resources are fully utilized.

Relationship Between LRAS and PPC

• LRAS represents sustainable output and is closely related to but not the same as the PPC, which shows potential combinations of goods an economy can produce.

• Economic growth allows better use of resources, moving towards full employment outlined in LRAS, increasing GDP and potential output.

• Factors contributing to this long-term economic growth include:

  • Increases in quantity and quality (productivity) of factors of production (F.O.P.)

  • Technological advancements

  • Supply-side policies (interventionist or market-based)

Managing Economic Growth and Output Gaps

• Short-term output gaps can be remedied by demand management (expansionary fiscal/monetary policies).

• Long-term economic growth influenced by supply-side policies can stabilize business cycle fluctuations.

Measuring Economic Growth

Growth Rate Calculation

• Formula: Growth Rate = (Real GDP in year 2 - Real GDP in year 1) / Real GDP in year 1 x 100

• Example GDP Data:

  • 2006: 1,283,033

  • 2007: 1,311,260 (Growth Rate: 2.2%)

  • 2008: 1,318,054 (Growth Rate: 0.51%)

  • 2009: 1,285,604 (Growth Rate: -2.46%)

Consequences of Economic Growth

Benefits of Economic Growth

• Economic growth often leads to increased AD due to rising populations and income levels.

• Non-inflationary growth occurs when AS also shifts to accommodate increased AD without raising price levels.

• Benefits:

  • Increased national output equates to increased national income.

  • Improvement in living standards and technology leads to better healthcare, appliances, transportation, and overall quality of life.

  • Increased tax revenues enable governments to invest in public goods and services, potentially reducing inequalities.

  • Enhanced competitiveness of exports can lead to increases in AD and trade engagement.

  • Higher incomes can lead to greater educational attainment and demands for freedoms and democracy.

Risks and Drawbacks of Economic Growth

• Potential negative effects include:

  • Poorer living standards and loss of leisure time as the drive for higher incomes persists.

  • Structural unemployment resulting from changes in economic output distribution across sectors, especially due to technology and globalization.

  • Environmental degradation due to rapid economic growth, resulting in increased greenhouse gas emissions and depletion of natural resources.

Conclusion

• Achieving sustained economic growth poses challenges, including managing inequality and environmental impacts.

• Evaluating both demand-side and supply-side policies is essential for promoting healthy economic growth.