Economic Growth Flashcards
Define actual growth.
Actual growth refers to the percentage annual increase in national output actually produced.
When does an incease in AD have a positive effect on the level of real national income?
An increase in the level of AD can have a positive effect on the level of real national income only if the economy has spare capacity.
Define potential growth
Potential growth refers to the percentage annual increase in the maximum capacity of the economy to produce goods and services.
What is the cause of Potential growth?
Change in LRAS (QTT)
a. Increase in Quantity of resources (CELL)
* More liberal foreign worker laws enabling higher influx of workers
* Increase in retirement age to encourage senior citizens to continue contributing to the labour force
* Incentives for homemakers and retirees to re-join the workforce, enabling a greater labour force participation rate
* Discovery of new mineral fields (such as crude oil deposits)
b. Increase in Quality of resources (CELL)
* Training more future-ready workers with higher labour productivity, through forward-looking educational system as well as ongoing incentives for upskilling and retraining for existing workers e.g., SkillsFuture initiative.
* Providing better quality healthcare to ensure a healthier workforce with higher labour productivity
* Adopting new work processes that increases labour productivity and hence yield/production
c. Improvement in state of technology
* Innovation efforts through research & development to develop new technology that can increase resource productivity. For example, new technology can create energy efficient transportation vehicles such as airplanes and buses that requires less fuel to operate. This means that with the same level of resources, more output can be produced.
How is potential growth represented on a AD/AS graph?
This is represented on the AD-
AS diagram in Figure 2 represented by a rightward shift in LRAS. This is because there is an increase in the productive capacity of the economy. With higher productive capacity, it results in an increase in the maximum amount of goods and services an economy can potentially produce by fully utilizing the factors of production.
Define sustained growth.
Sustained growth occurs when an economy’s national output increases continually over an extended period of time without inflationary pressures. This happens when there is both actual growth and potential growth.
What is the formula of sustained economic growth.
Sustained growth = Actual Growth + Potential Growth
Sustained economic growth happened when there is both actual growth and potential growth.
It only occurs when an economy’s national output increases continually over an extended period of time without inflationary pressures
Define sustainable growth
Sustainable growth refers to the rate of economic growth that can be maintained without creating other significant environmental problems such as depleted resources and environmental pollution for future generations.
How do you calculate sustainable growth?
Sustainable growth = Sustained growth + Environmental sustainability
What are some problems that may arise from non-sustainable growth.
Depletion of natural resources and environmental pollution and degradation.
The change of focus from sustained to sustainable economic growth often happens when economies reach a certain level of development and/or when the negative impact on the environment due to economic growth increases in significance.
How is sustainable growth achieved using government policies?
- Tax on goods and services producing negative externalities involving pollution
or environmental damage. e.g. carbon tax
2.Ban or quota on goods and services producing negative externalities - Tradeable permits
- Legislation & regulation (e.g. production methods are environmentally friendly)
- Public education (e.g., recycling)
- Subsidies on production of sustainable energy and alternatives
- Research & Development on production of sustainable energy and alternatives
Define inclusive growth.
Inclusive growth refers to a rate of growth is not only sustained over a period of time, but
is also broad-based across economic sectors and creates productive employment opportunities for the majority of the country’s population. The economic growth does not lead to the worsening of income or wealth inequality.
It is measured by Gini coefficient.
How to calculate inclusive growth?
Inclusive growth = Sustained growth + Equity
How is inclusive growth achieved?
- Redistribute income to the lower-income group
- Progressive tax system
- Transfer payments - To raise income of lower-income group through retraining and upgrading
- Retraining and upgrading labour
- Minimum wage
- Education - To lower prices and increase affordability of basic necessities by lower- income group
- Macroeconomic policies (to be covered in the later topics)
- Price ceiling on essential goods
- Subsidies on essential goods
- Free or direct provision of merit goods
What are the benefits of economic growth?
(a) Higher standard of living (SOL)
Households’ perspective:
* Economic growth results in an increase in real national income per capita. The higher real disposable income (assuming income tax rate remains constant) leads to higher purchasing power to consume greater quantity of goods and services. Material SOL increases
* The non-material SOL of an individual also
improves. With rising incomes and profits, the government can collect more tax revenue comprising income tax, taxes on goods and services and corporate tax. The government then has greater ability to spend on
improving quality of healthcare and that of education, which will increase the life expectancy and education indices under the non-material aspects of SOL under HDI. There can also be higher government spending to increase public goods such as nature parks and on environmental cleaning, which can increase leisure time and reduce pollution, which improves non-material SOL as well.
(b) Reduction of demand-deficient Unemployment
- Governments’ perspective:
When actual economic growth is due to increases in aggregate demand, firms have to employ more labour in order to meet the higher demand for goods and services.
- With an increase in the demand for labour, the level of demand-deficient unemployment decreases. With lower unemployment, social
issues like crime and homelessness are mitigated.
(c) Redistribution of income (for greater Equity)
Governments’ perspective:
- As a result of lower unemployment levels during periods of economic growth, the higher amount of tax revenue collected can be used to better redistribute income from the rich to the poor.
- As income increases, workers will progress to a higher income bracket, requiring them to pay a higher percentage of their income as taxes. The progressive tax system thus has redistributive effects since workers in higher
income brackets will pay more taxes. The higher amount of tax revenue collected can be used to better redistribute income from the rich to the poor.
What are the costs of economic growth?
(a) Negative environmental impacts and resource depletion (Unsustainable
Growth)
- Unsustainable economic growth occurs when the economy grows in a manner that does not sustain natural resources and the environment for future generations. A country’s economic growth may be unsustainable due to weak
environmental protection, uncontrolled growth of motor vehicles, reliance on more polluting fuels (e.g., coal) for power generation, and specialisation in highly polluting industries as part of her industralisation strategies. A polluted environment lowers the non-material SOL of both current and futuregenerations.
- Since the environment provides the factors of production that generate economic growth, the depletion of these resources (i.e., minerals, forests) will not only mean less resources for future generations to utilise, but also causes
climate change which is irreversible, thus potentially lowering the material standard of living of citizens of future generations.
(b) Income inequality and inequity (Non-inclusive Growth)
- Non-inclusive growth refers to economic growth that does not provide equitable
opportunities to every segment of society, resulting in more inequitable income distribution. This could be due to specialisation in capital, knowledge, skill or technology rather than labour intensive industries as part of its industrialisation strategies, or a result of insufficient efforts by its government to redistribute income and wealth.
- From the social point of view, this is undesirable as it causes factions of citizens
to be marginalised and left unable to cope with meeting their basic needs and aspirations. Hence, this income inequality results in unfairness in the distribution of economic welfare as lower-income households are unable to fford basic necessities, thereby leading to inequity.
(c) Structural Unemployment
Governments’ perspective:
Rapid economic growth could be achieved through increase in spending on capital goods (machines and equipment) and advances in technological improvement. Firms could substitute the use of labour with capital (machines) leading to more capital-intensive methods of production. Granted that
technological progress may create new jobs but at the same time, it could make current jobs and machines obsolete. The retrenched workers of declining industries lack the required knowledge and skills to join the newly emerging industries, and there is now a mismatch between the skills possessed by
workers and the skills needed by the economy, thus resulting in a higher level of structural unemployment and widening income gap.
(d) Inflation [Price (in)stability]
Governments’ perspective:
- With actual growth (due to increase in AD), general price levels will increase along with rise in real national income if the economy is operating at the intermediate and vertical ranges of the LRAS. If the rise in general price levels is sustained, inflation happens.
- Households face higher cost of living when the general prices of goods and services rise while still earning the same level of income.
- Firms face higher costs of production when the general prices of factors of production rise. To maintain their profits, firms may also henceforth transfer this increase in costs to households by increasing the price of final goods and services.
