Economic growth

Question 1

What is actual growth, how is it measured, and how is it achieved?

Answer 1

Actual growth refers to the increase in real national output in a given time period, usually a year.

It is measured by national income statistics - the % increase in real GDP over a year.

It is achieved through

(i) increase in AD, and/or
(ii) increase in AS

Question 2

What is potential growth, how is it measured, and how is it achieved?

Answer 2

Potential growth refers to the long-term expansion of a
country’s productive potential.

It is estimated by % increase in factor qty + % increase in factor quality.

It is achieved through increase in AS arising from increase in factor Q&Q.

Question 3

Diff btwn nominal GDP and real GDP?

Answer 3

Changes in nominal GDP reflect the changes in the total value of g&s produced in the ecy which could result from 2 effects:

• price changes
• changes in the vol of ec activity

% change in real GDP/actual growth = % change in nominal GDP - % change in GPL

Question 4

Rise in AD (leading to actual growth) can be caused by

Answer 4

Gov policies

• MP: cut in i/r
• FP: cut in direct tax; increase in gov spending

Expectations

• hhs expect their future Ys to incr
• hhs expect future prices of g&s to incr
• firms expect good future ec performance

External environment

• Relative inflation rates
• Depreciation of domestic currency
• Changes in T&Ps of foreign crs in favour of g&s from the cty
• strong ec growth of TPs

Question 5

Causes of potential growth in detail

Answer 5

Productive capacity of an ecy depends on Q&Q of FOPs

Quantity

1. Land
   - –> e.g. Sg’s land reclamation
2. Labour and entrepreneurship
   - –> increase population size through higher number of births/immigration/open L mkt that brings in foreign workers and foreign talent
   - –> increasing the participation rate of labour by encouraging female participation/extending retirement or re-employment age/extending working hours/relax immigration policies to encourage migration
   - –> promoting entrepreneurship by making credit more readily available to firms/creating strong support systems for SME through grants to be provided by gov
3. making physical Capital more easily accessible and cheaply available. Greater amts of capital incr the pdtive capabilities of workers -> incr pdtive capacity of the ecy

Quality can be improved through

1. Technological progress, which is dependent on
   - –> amt of resources allocated to R&D
   - –> presence of strong legal frameworks to ensure the protection of intellectual property
2. Human Capital Development thru
   - –> increased years of education
   - –> training & upgrading programmes
   - –> on-the-job skill development
   - –> improvement in healthcare & promotion of healthy lifestyles

Question 6

How can high and sustained economic growth be achieved?

Answer 6

(1) potential output needs to expand continuously, while at the same time
(2) making sure that there is an accompanying increase in economic activity

Question 7

Consequences of economic growth, +ve and -ve

Answer 7

Effect on material SOL
+ higher SOL and poverty alleviation
+ growth begets more growth; virtuous cycle of savings and investment
- investment comes at a trade-off w current consumption
- widening income gap and structural unemployment (growth does not alw make everyone better off)

Effect of non-material SOL
+ increased spending on merit gds
- negative externalities: environmental degradation undermines future growth
+ increased availability of resources to be directed to environmental protection/investment into green technologies

Effect on micro goals
- ec growth can lead to a loss of alloc efficiency (-ve ext) and equity (when the benefits of growth is not evenly distributed)
+ with ec growth, gov can enjoy larger tax revenue to allow it to direct more spending on public and merit gds to reduce allocative inefficiency and inequity

Effect on macro goals
-/+ Inflation & Unemployment:
(i) if ec growth is due to rising AD w/o significant incr in AS -> fall in CUE, rise in dd-pull inflation
(ii) if ec growth is due to technological innovation -> may result in SUE, fall in inflation
- worsening of trade balance
+ growth has a positive effect on gov finances

Question 8

What are low/sluggish growth, falling growth rate, negative growth? (think in graph form)

Answer 8

Low/sluggish growth:
when ur AD increases but by a small extent

Falling growth rate:
3-line AD diagram, where the 2nd incr in AD is by a smaller extent than the 1st incr

Negative growth rate:
AD shifts left.

Question 9

What is defined as a technical recession?

Answer 9

An ecy is said to be in a technical recession when real GDP growth rates remain negative for 2 consecutive quarters.