Economic Growth

How is structural unemployment caused by economic growth?

- Growing economies experience structural changes as productivity gains in the secondary and tertiary sectors lead to an ever-shifting demand for skills in the labour force. - Unemployment results among workers whose skills are no longer needed as an economy grows and the composition of output evolves from primary commodities to manufactured goods to high-skilled services.

How is inflation caused by economic growth?

- Growth achieved primarily through increases in AD can result in greater output per worker but also inflation. - e.g. in China—real GDP growth rate for 2010 reached an astonishing 10.3%, a rate which made China the second largest economy in the world by early 2011 but with an inflation rate of 5% - Hence, the negative effect of China's rapid growth is an ever-increasing cost of living for the Chinese household, a hardship ignored by official growth and inflation figures.

How are externalities caused by economic growth?

- Increases in a nation's output often lead to decreases in environmental and physical health. - - Firms that externalize their production costs by polluting air and water keep their costs low and are thereby able to sell their products at lower prices and produce greater quantities of output. - - The real GDP of the nation may grow, increasing per capita income, but the environmental and physical health of the nation may simultaneously diminish due to the externalizing behaviour of growth-focused firms.

What can we use to illustrate economic growth?

- PPC (e.g. producing more capital goods—inputs—instead of consumer goods thereby to produce and consume at a level beyond its current full-employment level) - business cycle (illustrates both short-run economic growth and long-run economic growth) - AD/AS model

What is economic growth?

sustained upward trend in the total output of goods and services in a nation.

How is resource depletion caused by economic growth?

- Sustainability is not reflected in a nation's growth figures. - In its pursuit of greater output, a nation's non-renewable resource base may be depleted at an unsustainable rate. -Growing economies experience structural changes as productivity gains in the secondary and tertiary sectors lead to an ever-shifting demand for skills in the labour force. - Unemployment results among workers whose skills are no longer needed as an economy grows and the composition of output evolves from primary commodities to manufactured goods to high-skilled services. For instance, Brazil's GDP may increase as the Amazon rainforest is converted into sugar and soy plantations and land for grazing cattle because these commodities are counted in the national output. - However, the economic value of the standing forest is not subtracted from Brazil's growth figures, nor is the depletion of soil fertility and the decline in biodiversity resulting from environmentally harmful economic behaviour.

How is unequal income distribution caused by economic growth?

- benefits of economic growth may be enjoyed by an elite minority within the nation's economy or even among foreign owners of capital in the country. - often accrue among the capital owners, shareholders in large corporations, corrupt political leaders or the educated classes, while the working class, lower-skilled workers in the secondary sector or the rural poor may be left out of the gains from growth. - Governments must ensure through progressive taxation and transfer payments that the benefits of growth are enjoyed by all citizens.

What are the non-economic consequences of growth?

- externalities - resource depletion - inflation - structural unemployment - composition of output - balance of payments - unequal income distribution

What are the causes of productivity growth?

- primary prerequisite for long-run economic growth of a nation and improvement in per capita income and the average standard of living of a nation's people. made possible only by an increase in the quantity or the quality of productive resources in the nation. - rooted in worker productivity (measured in output per hour, and indicates the value of the average worker's output attributable to one hour of work) as correlates to an increase in growth per capita income - can also result from increases in the number of workers, but since the size of the labour force usually only grows when the entire population increases, this type of growth in GDP is unlikely to lead to increases in the average income of a nation

In what ways is physical capital a source of productivity growth?

- refers to the human-made resources employed in the production of goods or services (e.g. factories) - major source of increases in worker productivity is the increase in the quantity and the quality of the physical capital available to each worker in a nation - higher national levels of private investment increase the quantity and the quality of physical capital, which makes workers more productive and leads to long-run economic growth

In what ways is human capital a source of productivity growth?

- refers to the value of labour created through education, training, knowledge and health - achieved through improvements in the education and health of a nation's workforce. - ultimate resource and driver of economic growth - as physical capital depends on inputs of natural resources for production this means that physical capital is also limited by the scarcity of natural capital. - therefore, the infinite nature of human capital, argued Simon, is the key to overcoming the physical scarcity of natural capital. More and better education is the key to improving human capital and achieving long-run economic growth among all nations.

How does the business cycle demonstrate economic growth?

- upward-sloping sections of the business cycle represent periods of rapid short-run economic growth - when the level of demand for a nation's output grows more rapidly than the level of AS, output may increase beyond the full-employment level in the short run - but as wages and prices adjust to higher levels of demand, output will eventually fall and the period of rapid growth is followed by a contraction or recession. - A nation's business cycle reflects periods of unsustainable short-run growth fuelled by fluctuations in AD, but also a long-run upward trend in output resulting from increases in the quantity and the quality of the nation's resources over time.

How can we compare a country's GDP?

- while a basic tenet of economics that the standard of living of people improves when they are able to produce and consume more goods and services - a nation with a large population may have a higher GDP than a much smaller nation, but the large nation is not necessarily richer - important to measure the average output per person (GDP per capita) - the output of goods and services in the world has far outpaced the growth in population, pointing to an increase in the average income and standard of living of the world's people due to economic growth

What are some shortcomings in using real GDP as a measure of growth?

- while changes in real GDP (determines whether or not output has increased regardless of the inflation rate) are a more accurate measure of the size of the economy - falls short in measuring the wellbeing of the people - if population grows more rapidly than output, then the average person may have a lower income even as real GDP grows; for this reason per capita real GDP is a superior measure of the standard of living of a nation's people.

Why is government investment necessary in human capital?

- will promote policies that contribute to the education and training of the nation's population. Such policies lead to greater productivity and output per worker and ultimately promote long-run economic growth. - socially optimal levels of education and healthcare are not likely to be provided if they are left entirely to the free market. Such merit goods will be under-provided by the private sector due to the non-rivalrous nature of their benefits to society as a whole. - government investment is required to improve and equip a nation's stock of human capital with the skills and knowledge necessary to promote economic growth and increases in income and quality of life for the average worker.

What is the economic consequence of growth?

an increase in the average level of income and consumption in a nation.

How is the balance of payments affected by economic growth?

definition: measures all the flows of money, income, goods, services and resources between one nation and the rest of the world - rising domestic incomes generally lead to a net inflow of goods from the rest of the world, shifting a nation towards a deficit in its trade balance with other countries. - deficit is necessarily accompanied by an inflow of funds from investors abroad seeking to purchase domestic assets, such as factories, real estate and government debt. - while such trade imbalances are not necessarily a bad thing, they do lead to several other challenges for government t

How is the composition of output affected by economic growth?

military goods/ - an economy which invests heavily in military equipment or weapons technology may achieve rapid economic growth - but such production does little to improve the material well-being of the average person in that country, for whom production of consumer goods and services is more beneficial. - Military spending may help a nation expand its industrial and political agenda abroad and create employment at home - but the trade-off is a decreased quantity and variety of consumer goods for the nation's households to enjoy. /capital goods - Growth may be the result of high levels of investment by firms in capital rather than high levels of consumption by households. - Capital investment, while contributing to the nation's stock of productive resources, does not directly benefit households, for whom production of goods and services for domestic consumption is desirable.

What is the definition of productivity?

productivity as the amount of output per unit of input.