Transcript The Nature of Economic Growth

The Nature of Economic Growth
A2 Economics
Aims and Objectives
Aim:
• Understand how to generate economic growth
Objectives:
• Explain how governments generate economic growth
• Describe the causes of economic growth
• Analyse the advantages and disadvantages of economic
growth
• Evaluate Chinese economic growth
Starter
• UK economic growth shrinks.
• http://www.bbc.co.uk/news/business-16725993
Generating Economic Growth
Price Level
• If an economy is operating below its potential output an
increase in AD will cause a rise in equilibrium national
output (GDP).
• Increase in AD leads
LRAS
to an increase in real
GDP from Y1 to Y2.
P2
P1
AD2
AD1
Y1
Y2
Real GDP
• AD will increase if one
or more of its
components rise.
Generating Economic Growth
Price Level
• Increases in investment and some forms of government
spending, for example, on education and R&D will also shift
the LRAS curve.
• Long term economic
LRAS2
growth requires this
LRAS1
shift.
• When attempting to
boost LRAS must
consider supply side
policies. (Increase
potential GDP)
Real GDP
Generating Economic Growth
• May there be any negative effects on an economy if a
government were to boost AD alone?
• Could be inflationary as in 1960s/1970s
Generating Economic Growth
• There must be a mixture of AD and AS policies to avoid
large fluctuations and instabilities in the economic cycle.
• This will create a positive environment for investment and
consumer spending to occur.
Causes of Economic Growth
• How could each of the following cause economic growth?
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Economic stability and macroeconomic policies
Increasing labour activity / participation
Increasing labour productivity
Investing in physical capital
Improving education/training
Enterprise
Ideal environment for
business investment
Fluctuations in
demand lead to
business and
consumer uncertainty.
Economic Stability &
Sound Policies
Firms more inclined to
produce
goods/services and
expand their
operations.
Government policies must be focused
towards promoting stable economic
growth.
Growth requires an
increasing number of
people to be actively
employed.
Various factors lead to
employment rising such as
rise of women in the
workforce.
Increasing Labour
Activity
Could lead to increase
in wage rates, and
inflation.
Labour supply increases, increasing
the potential output of economy. How
sustainable is this?
Key to achieving high
long term growth rates
Increasing Labour
Productivity
Key to increasing productivity is
improvements in both physical and
human capital.
UK internationally poor
productivity rates.
Allows labour to work
with more/better capital
equipment
Investment in
Physical Capital
High levels of capital investment will
only translate into high economic
growth if the equipment uses the best
technology and the business uses it
efficiently.
Quantity and quality of
capital investment
vital.
Government can encourage
investment levels by lowering tax on
business profits or providing tax breaks
for R&D.
Investment in
Human Capital
Strong economic growth will need an
increasingly flexible workforce.
An educated and skilled
workforce will be more
productive and help to
generate economic
growth.
Advantages & Disadvantages of Economic
Growth
• On your whiteboards.
• Decide on one advantage of economic growth & one
disadvantage of economic growth.
Rise in standards of
living.
Raises tax revenues without having to
raise taxes. These can be redistributed
to reduce inequalities or provide merit
goods/correct market failure from
demerit goods.
Developed world
consumers benefits
from a broader range
of goods/services.
Allows absolute poverty
to be reduced or
eradicated.
May lead to volatile
growth, which inevitably
if not managed will lead
to a deep recession.
May be at the expense of negative
externalities due to industrialisation
without pollution controls.
Growth may lead to
inflation.
May lead to greater
inequalities in economy.
Relative poverty may
increase.
Is China approaching a growth slowdown?