Transcript Chapter 15

Chapter 15
The economics of growth
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
15-1
Learning objectives
• Understand how growth is defined and why
it is important
• Discuss the sources or ingredients of growth
• Describe the classical growth model and
its dismal implications
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PPTs t/a Macroeconomics by Jackson and McIver
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15-2
Learning objectives (cont.)
• Analyse how labour productivity and, therefore, living
standards can be raised
• Develop a formal full-employment growth model
• Describe and explain the growth record
of Australia
• Briefly survey growth policies
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PPTs t/a Macroeconomics by Jackson and McIver
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15-3
Learning objectives (cont.)
• Review the debate over the desirability of growth as
an economic goal
• Examine whether continued economic growth
is feasible
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Growth economics
• Concerned with analysing the patterns of long-term
trends in an economy’s productive capacity and the
factors that influence these trends
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Economic growth
• Economic growth is defined and measured
in two ways:
• Increase in real GDP over time (% p.a.)
– E.g. comparing regional economic power or influence
• Increase in real GDP per capita over time (% p.a.)
– E.g. comparing standards of living
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Importance of growth
• Greater ability to face economic challenges
– Small changes in growth can dramatically affect
a country’s economy
• Increased opportunities
– incomes, education, social welfare, environmental
• Lessens the burden of scarcity
• Allows economy to realise economic goals
more fully
• Places a nation in a better position to resolve domestic and
international socioeconomic problems
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Causes of growth
• Supply factors: physical ability of economy to grow
–
–
–
–
Quantity and quality of natural resources
Quantity and quality of human resources
Supply or stock of capital goods
Technology
• Aggregate demand and resource allocation factors
– Demand factor
– Efficiency factor
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Supply factors
• Growth is attributed to the availability of more
and better resources, including the stock of
technological knowledge
• Two ways to increase output:
– Increase in inputs of resources
– Increase in the quality or productivity of those inputs
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Supply factors (cont.)
• Labour force productivity
– Labour productivity is the real output per worker per
hour
• Real output = worker hours × labour productivity
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Demand factors
• A growing level of demand is required in order
for the full-employment of an expanding supply
of resources
• Demand and supply factors are interrelated
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Allocative factor
• In order to achieve productive potential,
a nation must:
– Have full-employment of resources
and
– Achieve full production from resources
• Resources must be allocated to get the
maximum amount of goods and services
possible
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PPTs t/a Macroeconomics by Jackson and McIver
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Production possibilities
• Recall the production possibilities curve:
– points on the curve represent maximum amounts
of production
– points inside the curve represent a failure to achieve
full employment and full production
• Improvement in supply factors will shift
the curve outwards
• Economy will not necessarily operate on
the curve unless demand is sufficient and allocative
efficiency is realised
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Economic growth and the production
possibilities curve
Capital goods
C
A
B
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D
Consumer
goods
15-14
Models of growth:
The classical model
• Emphasises the supply side of economic growth
– Determinants of the productive capacity of the
economy
– Interaction of:
 Law of diminishing returns
 Population growth
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Law of diminishing returns
• As successive increments of one resource
are added to a fixed resource, beyond some
point, the resulting increases in total output
will diminish in size
• Disproportionate increases in resources
– E.g. large increases in labour, smaller increases
in arable land
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Population growth
• Optimum population
– Population which, given the economy’s natural
resources and technology, will yield the greatest
income per person
• Population growth may be a mixed blessing
– Malthus’s thesis: Given diminishing returns, persistent
and substantial population growth will force and
maintain the standard of living close to the subsistence
level (less developed countries)
– If population growth coincides with increases in labour
productivity then rising standards of living will occur
(industrially advanced countries)
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Aggregate expenditures
and growth
• Expanding levels of demand needed to achieve
full-employment GDP
• Investment can be:
– Income creating
– Capacity creating
 Capital–output ratio
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Full-employment growth model
Capital–output ratio
• Relationship between net increases in the size
and value of the capital stock (net investment)
and sustainable increases in real GDP (capacity
output)
– For example, ratio of 4 means for every $4 of net
investment in year 1 the economy is capable of
producing $1 of additional output in year 2 and
succeeding years
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Australia’s growth record
• In the past 50 years:
– Real GDP increased by 6.3 times
– Real GDP per capita increased by 2.8 times
over the period
• Substantial improvements in product quality
and leisure time have been made
• Growth has been less than in many other developed
nations
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Sources of Australian growth
• Labour inputs
– Immigration
• Productivity increases
– Technological progress
– Stock of capital
– Education and training
• Allocative efficiency and growth
• Other factors
– Political stability
– Social philosophy
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Population and labour force growth
1870–71 to 2001–02
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15-22
Sources of population growth
1949–50 to 2001–02
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Growth policies
• Purposeful action on the government’s part
to enhance the prospects of growth
• Policy depends on the school of thought
– Keynesian policies
– Supply-side policies
– New-classical economics and minimum
government intervention
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Case against growth
• Pollution and environmental deterioration
• Problem resolution
– Does growth mean that poverty is eliminated?
• Human obsolescence and insecurity
– Increased insecurity as machines replace humans
• Growth and human values
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Case for growth
• Improved living standards
• Environmental benefits
– Control pollution not growth
• Income inequality
– Growth with redistribution can achieve greater
equality in the distribution of income
• Non-material considerations
– Growth is more consistent with ‘the good life’
than is stagnation
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Doomsday models
• Club of Rome
• Growth paths of population, output and pollution are
on a catastrophic collision course with production
limits imposed by natural resources
and the pollution-absorbing capacity of the
environment
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Doomsday models (cont.)
Criticisms:
• The price system
• Behavioural patterns
• Role of technology
• Applying existing knowledge
• New resources and products
• Increasing returns to technology
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PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
15-28