Econ Growth + Development Flashcards
How does Growth in Developed countries occur?
Increased AD–> Increased Econ. Output–> Econ. Growth
–Growth is only possible w/ Increased AS
What happens if AD grows without AS
If AD>AS–> Unsustainable Growth- Inflationary as Economy approaches Full Employment
Economy hits a wall- Output can’t Increase further
What happens if AS grows without AD
Prices Fall- DEFLATION
How can sustainable growth occur
Increase in AD + AS
Define L.R Growth
All FoPs are variable- Capital can Increase + develop
What can Increase AD?
Consumer + Firm Confidence- Investment + Spending Gov. Spending Lower Taxes Lower I.R CAN'T be sustained in L.R
Why can’t Gov. Spending be sustained in the LR?
Causes LARGE Deficits- unsustainable
Why can lowering IR be sustained in the LR?
Zero-lower bound- limits extent of policy
Liquidity Trap- Unsustainable
How can LR Growth be achieved?
Supply-side Policies- Sustainable growth
Increasing AD keeps growth going
What factors can Increase AS?
Lower Gov. Regulation- Deregulation
–Limit to amount of regulation that can be removed
Reduce Wages/Input prices
–Limit to amount these can Decrease
Increase Worker Productivity
–Can theoretically increase w/ no bound- best driver for growth?
How can Worker Productivity be improved?
Better align workers w/ Equipment + Technology
Work Smarter, better + More Efficiently
What are the Drivers for Worker Productivity?
Physical + Capital Accumulation
-Capital formation + Education & Training
What is Capital Formation?
-There must be a balance between Savings + Consumption
If Tax on Savings too high- Supply of Loanable Funds too LOW
Lack of Loans–> Too Low Investment
-Taxes on Capital Gains must be Reasonable
Otherwise No motivation to Invest- Lowers Investment
-Workers must be Motivated- to learn + gain knowledge to apply to workforce
Why is UK Productivity growth so Sluggish?
Negative Output Gap- ~18%
Business Capital Spending on Technology fell
Increasing Skill Shortage- Engineering, Specialist Technology + Finance
How can UK boost Productivity?
Increase Spending on Infrastructure- Local Transport (commuting), Internet Connectivity, provide more Housing nearer Jobs
Increase Spending on Research + Skills- R&D- especially by Universities + Allow International Qualified workers into UK labour Market
What is PPP?
Purchasing Power Parity- compares a basket of similar goods across countries to measure Income
Accounts for Real Exchange Rates
What is the Solow Growth model?
Economies would Converge in levels of Econ. Development
Poor countries would grow at faster rate + catch up to Developed economies in GDP/capita levels
Why has the Solow Growth model not been the Reality?
Developing countries do NOT have Political +/ Banking Structure + Framework to support Growth
What are the main issues for Developing countries Growth?
Low Basic Literacy rates- poor education
Lack of Infrastructure- financial, physical + legal
Political Instability- unstable Govs., Civil War increase cost of Resource exploitation
Corruption- ‘Grand’ + ‘Petty’ corruption
Lack of Independent C.B- necessary to control Inflation
Inability to repatriate profits- profits may return to origin country
Unable to Invest in Education etc- Must focus on Basics- Healthcare + Food
ALL Unattractive to Investment
What has been the cause for Growth of various countries?
China + South Korea grown Significantly
-China- one-ruling party political framework
-South-Korea- politically liberalised framework
Saudi Arabia- grown due to Natural Resource- Oil
Japan- grown without many Natural Resources
What are the Basics for Growth?
Education
Low+Manageable Corruption
Political + Financial Stability- Increase confidence for FDI
How do Physical + Social Infrastructures help foster growth?
Predictable Gov. + Political + Financial Stability–> Growth
