Transcript Chapter 26

PART 10 ECONOMIC GROWTH AND
DEVELOPMENT
Chapter 26 Economic growth
East Asian growth
Miracle or myth?
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Lecture Plan
• Meaning of economic growth
• Economic growth and the PPC model
• Indicators of economic growth
• Limitations of GDP
• Sources of economic growth
–
–
Supply factors
Demand factors
• Theories of economic growth
• International comparisons (the PPP method)
• Costs and benefits of economic growth
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The Meaning of Economic Growth
• Economic growth: a sustained increase, over
time, in the real value of the production of goods
and services (GDP growth)
• It means increasing the quantity or volume of goods
and services available in the economy in order to
satisfy as many wants as possible
• Production Possibilities Curve (PPC) shows the
different maximum possible combinations of
quantities of two types of goods
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The PPF model and economic growth
• When the quantity
A
and/or quality of
resources increases
the economy can
produce more of both
products and the entire
curve will shift
outwards
• This is a representation
of economic growth
B
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Indicators of Economic Growth
• Real GDP (GDP at constant prices)
• The increase in real GDP/GNP per head
• Gross National Product (GNP)
• Net Domestic Product (NDP) = GDP – depreciation
of capital equipment
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Limitations of GDP
• As a measure of economic growth, GDP ignores
–
–
–
non-monetary incomes
Unpaid production
The cash economy and black markets
• As a standard of living indicator,GDP/head ignores
–
–
–
Income distribution
The amount of effort required to produce GDP
The costs of growth (e.g. pollution, stress)
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Sources of Economic Growth
• Supply factors
–
–
–
Natural resources (land)
Human resources (labour and enterprise)
Capital goods
• Demand factors
–
Allocative factors
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Theories of Economic Growth
• The classical view of economic growth
(Ricardo and Malthus)
–
–
Law of diminishing returns
Population explosion and subsistence living
• The neo-classical growth theories
–
–
–
‘Endogenous’ growth theories
Government role
Social competence
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Comparative Economic Growth, OECD
and Australia (% p.a.), 1990 to 2003
6.0
5.0
% p.a.
4.0
3.0
Australia
2.0
OECD
2002
2000
1998
1996
1994
–1.0
1992
0.0
1990
1.0
Source: Adapted from OECD, Economic Outlook, June 2004.
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International Comparisons
• World Bank Atlas method: 3-year average of
international exchange rate
• The purchasing power parity (PPP) method:
calculates the size of an individual economy on the
basis of what a country actually produces and
consumes
• The PPP conversion factor = the number of units of
a country’s currency required to buy the same
amount of goods and services in the domestic
market as US$1 in the United States
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East Asia’s Economic Growth: Myth
or Miracle?
• P. Krugman (1994): East Asia’s growth—same as in
the old Soviet Union—is based only on mobilisation
of more resources, not on efficiency
• Studies by the World Bank and other economists
indicate an increase in ‘Total Factor Productivity’
(e.g. quality growth) in East Asia, close to
developed economies
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Benefits of Growth
• More goods and services
• Material living standards (consumption) can be
raised
• More employment opportunities
• Reduces government outlays for unemployment
benefits and other related social measures
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Costs of Economic Growth
• Pollution, environmental damage
• Urban and suburban congestion
• Excessive use of scarce non-renewable resources
• Shortages of skilled labour
• Limits to growth?
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