Economic Growth

11.1 Tragakes
How to Measure Economic Growth?
How to Illustrate Economic Growth
Illustrating Long Term Economic Growth
Long Term Economic Growth: Keynes v
Classical
PPC Short Term v Long Term Growth
Real World Application
Name and explain a new technology that is expected to to produce long
term economic growth.
Exam Application
Evaluate the view that economic growth is always beneficial (10)
What are the Sources of Economic Growth?
(Changes in AD)
Short Term Increases in AD

Higher consumer spending

Increased capital investment
Domestic investment
Inward investment from overseas
Rise in government spending on goods and services or a fall in
government taxes
Increased exports sold to overseas countries
A reduction in import spending
What are the sources of Economic Growth?
(Changes in AS)
Supply-Side Explanations

Higher productivity (factor efficiency)

Increased supply of factor inputs
Expansion of employable labour supply
Increase in the stock of capital inputs
Exploitation of new finds of natural resources

Technological advances
Innovation and invention
Improvements in production process which reduce unit costs
Productivity matters in boosting growth
UK Labour Productivity and the Economic Cycle
Annual % change in output per worker for the whole economy
4.5

4.0

Real GDP
3.5

3.0
Percent

2.5

2.0

1.5
Productivity
1.0

0.5
98 99 00 Labour
01productivity
02 03 04 05

Output per worker, whole economy, seasonally adjusted [ar 4 quarters]

Gross Domestic Product [ar 4 quarters]
Source: Reuters EcoWin
Long Term Economic Growth: Keynes v
Classical
 Growth using AD-AS
analysis
Aggregate demand and aggregate supply diagrams illustrating economic
growth for an economy
Benefits of economic growth
Growth creates new Higher real incomes More tax revenues
jobs in the economy – higher living for the government
standards

Benefits from economic growth

Higher profits can Rising wealth – Increased funds

fuel increased may be used to available for
investment reduce poverty infrastructure
Possible disadvantages of economic growth
Risk of demand- Growth may be Risks of
pull inflation linked with rising environmental
inequality damage / costs

Risks from economic growth

Over-exploitation of Opportunity cost of Social problems

scarce finite increased capital arising from
resources investment consumer society
Describe and Explain the relationship unemployment
and inflation
The Overall View
Main objectives of government
macroeconomic policy
Sustained economic growth
Stable prices (low inflation)
A high level of employment
A rise in average living standards
Sustainable position on the balance of payments
Sound government finances
Growth-inflation trade-off for the UK
The trade off between unemployment and
inflation
Is there a possible trade-off between unemployment and inflation?

When the rate of unemployment falls to low levels, there is a risk that wage
and price inflation will start to pick up

Falling unemployment leads to an increase in AD which can lead to demand

pull inflation if SRAS is inelastic
A trade-off between economic growth and the
trade balance
Is there a trade off between fast economic growth and a worsening
of the balance of trade in goods and services?
Yes
When AD is high and domestic producers are unable to meet all of this
demand, so the demand for imported goods and services will increase
leading to an increase in the trade deficit
The recent economic upturn in the UK has been driven by a surge in
consumer spending, much of which has been spent on imports – the trade
deficit in goods widened to over £45 billion in 2002
A trade-off between economic growth and the
trade balance
No
The causes of a trade deficit are not solely cyclical – there are structural
explanations too
Much depends on the strength of the exchange rate and the non-price
competitiveness of British businesses
The rate of growth of demand in overseas markets is also a factor affecting
the trade off
Export-led growth can bring about GDP growth without a deterioration in a
country’s trade balance
The Overall View
11.2 Sustainable Debt
1. What is meant by national debt?
2. What is a budget deficit?
3. What is the difference between national debt and budget deficit?
4. How does the government borrow?
5. What is debt to GDP ratio?
6. Which country has the highest debt to GDP ratio?
7. What is debt servicing?
8. What is sustainable debt?
9. What is the debt trap?
Answers
National Debt - Government’s accumulation of budget deficits minus
budget surpluses
Budget Deficit - Government tax revenues are less than government
expenditures over a specific period of time
Difference - Total amount over time vs Amount over 1 year
Borrow - The government can borrow from the private sectors
Debt to GDP Ratio - A metric for comparing a country’s public debt
to GDP
Highest Debt - Venezuela
Answers
Debt Servicing - The payments that must be made in order to repay
the principal (the amount of a loan) plus the interest
Sustainable Debt - A level of debt where the borrowing government
has enough revenues to meet its debt obligations without overdue
debt payments, while also allowing economic growth at an
acceptable rate
Debt Trap - When one owes a huge amount of money to various
institutions or people, which feels never-ending.