Government and the Economy: Economic Growth Study Notes

GOVERNMENT AND THE ECONOMY: ECONOMIC GROWTH

LEARNING OBJECTIVES

  • Understand macroeconomic objectives

  • Understand how to define economic growth

  • Understand how GDP is used to measure economic growth

  • Understand the limitations of using GDP to measure economic growth

  • Understand the economic cycle: boom, downturn, recession, and recovery

  • Understand the impact of economic growth on employment, standards of living, poverty, productive potential, inflation, and the environment

SUBJECT VOCABULARY

  • budget deficit: The amount by which government spending exceeds government revenue.

  • macroeconomics: The study of large economic systems such as those of a whole country or area of the world.

  • microeconomics: The study of small economic systems that are part of national or international systems.

  • economic growth: Increase in the level of output by a nation.

  • national income: The value of income, output, or expenditure over a period of time.

GETTING STARTED

  • Government plays a key role in managing the economy, including promoting growth, controlling inflation, and reducing unemployment.

  • Example: Canadian Liberal party under Justin Trudeau aimed to improve a sluggish economy through various policies prior to the 2015 election.

CASE STUDY: CANADA

  • Economic Policies:

    • Raise taxes for the wealthiest 1% to redistribute income.

    • Introduction of child benefits for middle-class families (e.g., CAD 2500/year).

    • Increase maximum grants for low-income students (CAD 3000/year for full-time students).

    • Cap the budget deficit at CAD 30 billion over 3 years.

    • Invest CAD 6000 million in green infrastructure over 4 years.

    • Double infrastructure spending to CAD 120 billion over 10 years (includes CAD 3400 million for public transit and CAD 5000 million for water facilities).

  • Results by end of 2016:

    • Economic growth was minimal, with national income up by 1.2%.

  1. Discuss whether Trudeau's policies are effective.

  2. Address job creation potential from these policies.

  3. Emphasize the government's importance in the economy through discussion.

  4. Engage in class discussions about your country’s economic state.

WHAT IS MACROECONOMICS?

DEFINITION AND OBJECTIVES

  • Macroeconomics studies the economy as a whole, including total income, employment levels, price levels, and trade patterns.

  • Macroeconomic Objectives:

    • Reducing unemployment

    • Income redistribution

    • Controlling inflation

    • Protecting the environment

    • Promoting economic growth

    • Balancing payments.

WHAT IS ECONOMIC GROWTH?

  • Economic growth is largely defined by the rise in national income—sum of all income, profit, royalty, and interest earned within a given period.

  • Significance of economic growth:

    • Enhances national income, leading to increased business profitability and hiring.

    • Established positive circle: more jobs lead to increased consumer spending enhancing economic growth.

MEASURING ECONOMIC GROWTH

GROSS DOMESTIC PRODUCT (GDP)

  • GDP: Market value of all final goods and services produced in a country annually, crucial for quantifying economic output.

  • Includes both domestic sales and exports, while omitting intermediate goods.

  • International comparisons made possible by standardized GDP accounting.

  • Example Graph: EU GDP growth (1996–2016) had fluctuations, predominantly under 1% with a notable decline post-2008 recession.

LIMITATIONS OF GDP AS A MEASURE OF GROWTH

  1. Inflation: A rise in prices can create misleading growth rate impressions.

  2. Population Changes: GDP per capita must be assessed alongside population growth.

  3. Statistical Errors: Inaccuracies in data collection may distort the true GDP.

  4. Non-Traded Goods: Home-produced goods and services not included in GDP figures.

  5. Hidden Economy: Informal transactions escape official GDP measures.

  6. Quality of Life Indicators: GDP increase does not imply enhanced living standards; leisure time, income distribution, and pollution must also be considered.

  7. External Costs: GDP does not factor in negative externalities like environmental damage.

THE ECONOMIC CYCLE

  • Phases:

    • Boom: High GDP growth; rising jobs.

    • Downturn: Slowing growth; rising unemployment.

    • Recession: Consecutive decline in GDP.

    • Recovery: Economy rebounds, GDP rises again.

THE IMPACT OF ECONOMIC GROWTH

  • Growth positively affects:

    • Employment: Increased business output demands labor.

    • Living Standards: More disposable income leads to improved lifestyle.

    • Poverty: Reduction of poverty through job creation and tax revenue enhancements.

    • Productive Potential: Growth can raise production capabilities and shift production possibility curves (PPCs).

    • Inflation: Overly rapid growth can lead to unsustainable inflation rates.

    • Environment: Industrial growth may result in resource depletion and increased carbon emissions.

HANDOUTS: EXAMPLES, GRAPHICS, AND CASE STUDIES DISCUSSED

  • Graphical Representation (PPC) and numerical data illustrating economic growth impact and statistics supporting GDP applications.

  • Practical Examples: Country-specific policies and metrics illustrating theory, i.e., Canada's investment strategies.

  • Class Interaction Activities: Discussion questions post-case studies offering real-time economic interactions and trends relevant to contemporary understanding.

MULTIPLE-CHOICE QUESTIONS

  • Post discussion, conducting MCQs based on the objectives and advantages/disadvantages of economic principles discussed in class.

SUGGESTED READINGS/REFERENCES

  • Refer to additional macroeconomic texts and related materials for deeper understanding of outlined topics.