Economic Growth

Last updated Sep 12, 2023 Edit Source

Definition - Economic Growth An increase in the capacity of an economy to produce goods and services over time

• The increasing capacity of the economy to satisfy the material wants of its society

• The rate of increase in the capacity of the economy to satisfy the needs and wants of people in an economy

• The rate of change in real GDP over a given period of time

The target of Australia’s GDP is 3-4%.

• If an economy is operating inside its PPF and produces more as a result of using preciously unemployed resources, or using resources more efficiently - referred to as actual growth
• This is illustrated by a movement from a point within the PPF to a point towards or on the PPF

• The productive potential of an economy may be increased by an increase in the quality and/or quantity of resources - known as potential growth
• This is illustrated by an outward shift of the PPF

Definition - GDP The total market value of all final goods and services produced in a country during a certain time period

$$\frac{GDP_{yr2}\space - GDP_{yr1}}{GDP_{yr1}}*100$$ NB: Years can be replaced with quarters

Nominal GDP:

• The value of output expressed in the prices of the day Real GDP:
• The value of GDP after taking into account the value of inflation
• Real GDP (%) = Nominal GDP (%) - Inflation rate (%)

Real GDP per capita:

• Average real GDP per person in the population

• Doesn’t describe income distribution
• Coincident Indicator
• Non-market production
• Ignores externalities
• Doesn’t detail whether the growth is sustainable
• Does not describe non-material welfare

Growth can come from:

• Potential Growth:
  • Those that increase the capacity of the economy to produce more goods and services with available resources (supply side)
• Actual Growth:
  • How much expenditure is taking place to consume those goods and services (demand side)

• Increase the total size of the economy: greater demand for G+S and productive factors
• Increase in size of labour force: migration and natural increase
• Migration has more growth than natural: migration promotes transfer of wealth, knowledge and skills and positive fiscal impact

• Proportion of people over 15 years old who are in paid work or actively looking for work
• Higher involvement at work: increases the capacity of production (overcomes the effects of an aging workforce)
• Sustains government tax revenue

• Is the amount of output produced per hour worked

• Increase in the stock of capital relative to the stock of other productive resources
• Production becomes more capital intensive: increasing labour productivity
• Technology changes and improvements of function which help to increase the amount of output

• All other factors that improve a worker’s ability to produce goods and services (not capita)
• Knowledge and skills that workers develop through education and experience

• Factors that affect spending in the economy:
  • Consumption
  • Investment
  • Government expenditure
  • Net exports

Increased material standard of living

• Increased quantity of goods and services
• Satisfy more wants and needs

Increased Level of REAL INCOME

• How much money an individual or entity makes after accounting for inflation

Reduced Unemployment

• Growth stimulates demand for labour, which means more people will be employed and less unemployment

Improved Efficiency

• Promote knowledge, skills, productivity and tech changes

Fiscal Dividend

• Rising income will lead to higher taxation revenue which can be used for public and merit goods such as infrastructure, health, etc
• Public and merit goods generate considerable external benefits
  • More hospitals and schools mean a healthier and better-educated population

Structural Unemployment

• From structural change:
  • When people want new type of G+S and when inventions make it possible?

Inflationary Pressure

• When resources are fully employed and the economy is working near its capacity
• High inflation

Environmental Degradation

• As production and consumption increase, negative externalities (pollution, etc) are likely to arise

Social Dislocation

• High rates of growth may lead to crimes, stress related diseases, suicide, etc

Income Inequality

• May not raise standards of living of everyone in the economy at the same rate