Topic Topic 5: Long-Term Economic Growth & Supply-Side Policies

Question 1

Why is economic growth important?

Answer 1

• Improvement in living standards:(GDP) per capita rises over time with growth

• Increases resources available for healthcare, housing & education → improves our well being
• Production Possibility Curve shifts outwards

Question 2

What are the long term causes of economic growth?

Answer 2

• In the long run economy should be at full capacity so output, emplyment must be constant
• Change in AD in the long run just leads to inflation
• so increase in AS needed for economic growth to increase capacity of the economy to produce goods & services (PPC)

Question 3

How have GDP levels changed from 1960-2010?

Answer 3

• Doesn’t show per capita
• UK had smaller growth rate than many MDCs due to smaller productivity growth rate
• 2008-all countries had a dip

Question 4

Explain economic growth in BRIC countries?

Answer 4

• Developing countries with very high growth rates
• Aspects of developed countries e.g. education
• Considered EEs
• As AD curve shifts so does AS curve as they haven’t reached their PPC

Question 5

Explain economic growth and AS?

Answer 5

• In the long-run the aggregate supply curve is vertical, so output is not affected by aggregate demand
• This assumes that the quantity of labour, capital & land & their productivity (quality) remains the same until they increase & improve through economic growth

Question 6

What is an economy;s output determined by in the Neoclassical or Solow growth model?

Answer 6

Nobel Prize winning economist Robert Solow argued that economic growth is determined by:

• Technical progress e.g knowledge of pesticides
• Capital e.g.tractors
• Labour e.g. more workers

Question 7

What is the aggregate production function of the Neoclassical growth model that links inputs to outputs?

Answer 7

Y = A.f(L, K)

Y: output (GDP)
A: improvements in the quality of inputs
L: labour inputs - workers
K: capital - machinery, IT, retail space

Question 8

What factors can increase economic growth?

Answer 8

• More factor inputs (L&K)
• Technical progress & improvements in management
• Human capital
-These factors explain economic growth very well in
the 19th & early part of the 20th century

Question 9

Give examples of how more factor inputs improve economic growth?

Answer 9

e.g. China has grown through the transfer of workers from agriculture to industry (‘migration’),- so more in higher productivity industries

• UK from migration from the rest of the world

Question 10

Explain how Technical progress & improvements in management (A) improve economic growth

Answer 10

increases in the productivity of labour & capital, e.g. telecommunications, information technology
e.g. GDP per hour worked-highest in USA, lowest in UK, France and Germany catching the US up

Question 11

Explain how human capital improves economic growth?

Answer 11

• Improvements in education attainment & skills e.g. through R&D
• new knowledge and technicques to be discovered in science, engineering, medicine such as container ships to help economic processes and therefore growth
• Higher concentration of R&D from industry compared to education e.g. USA more likely to lead to growth

Question 12

What is the definition of the Endogenous growth theory?

Answer 12

Considers models in which the growth rate is affected by economic behaviour and policy.

Question 13

Explain the components of endogenous growth approach?

Answer 13

• Investment in capital through the ‘knowledge-based economy’:
-intangibles such ideas & knowledge –

-research & development (R&D)

Question 14

Explain the intangible (ideas and knowledge) component of the endogenous approach

Answer 14

• These do not depreciate over time & can spread to many areas of society e.g. country to country and industry to industry
• Role of government is to encourage R&D

Question 15

Explain the R & D component of the endogenous approach

Answer 15

by universities & private companies:e.g. grants to staff to research particular topic

• application of science to industry
• development of new products & technologies, e.g. the internet, electric cars e.g. Lboro given grants by motor companies to research fuel cell tech

Question 16

What is the role of business networks in economic growth?

Answer 16

Physical and/or digital clustering of businesses which share a common ‘pool’ of ideas, knowledge & labour skills which are shared

Question 17

What are some example business networks or clusters?

Answer 17

•Finance: London, Shanghai & New York – pool of skilled labour, infrastructure (e.g. airports), leading universities, e.g. LSE

•High-technology companies: ‘Silicon Fen’ in Cambridge, t - proximity to University of Cambridge with Apple, Huawei, Samsung research facilities,
Valley, Roundabout
motor racing: Silverstone race track (Oxfordshire), Honda, Renault F1, Williams F1, BMW Mini

Question 18

What are the aims of supply-side policies?

Answer 18

Aimed at shifting the aggregate supply (AS) curve to the right for economic growth

Question 19

What are some supply side policies?

Answer 19

• Education
• R&D
• Tax incentives

Question 20

Explain education as a supply side policy

Answer 20

• Improve attainment in schools & participation levels in higher education → productivity improvement in the workforce & increases in innovation
• e.g. UK attendance to University increased from 3% to 44% between 1950-2017. Also aims at education for all backgrounds
• but UK has problem of high skilled managers and low skilled workers

Question 21

Explain R&D as a supply-side policy

Answer 21

Encourage commercialisation of science through business networks, e.g. 25% of all UK R&D expenditure is in pharmaceuticals = reduce costs of imports and benefit from exports

Question 22

Explain tax incentives as a supply-side policy

Answer 22

To encourage R&D & for more people to participate in the labour market -encourages brightest and the best to come to UK

Question 23

What are some recent supply-side policies in the Uk outlined in the Plan for Growth 2011?

Answer 23

• Reduction in corporation tax to encourage investment & business expansion
• Reduction in the top rate of income taxation from 50% to 45% for those earning > £150k p.a.
• Support start-up businesses: business tax ‘holiday’ for 12 months: aimed at retail & high-technology companies
• Increasing R&D tax credit for small firms to improve technical progress: reduces the income at which your company pays tax
• Infrastructure
• Financial services

Question 24

Explain infrastructure policies from the Plan for Growth 2011?

Answer 24

•Improvements in communication & transport e.g. HS2

• lower the costs of doing business
• attracts foreign direct investment (FDI) & skilled workers from overseas e.g. Heathrow expansion has a lot of investment from overseas

Question 25

Explain the financial services policy from the plan for growth 2011?

Answer 25

•since 2008: well regulated & functioning industry should direct savings into profitable investments without threatening the stability of the entire economy

- greater role for Bank of England monitoring
- banks needs to hold more equity

Question 26

What is the equation for labour productivity?

Answer 26

(𝑜𝑢𝑡𝑝𝑢𝑡 (𝐺𝐷𝑃))/(𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑒𝑐𝑜𝑛𝑜𝑚𝑦)

Question 27

What is the problem with Uk productivity?

Answer 27

• barely improved since 2007 and low comoared to other developed countiries
• devition of long term trend pre financial crisis so UK lower than where it was heading

Question 28

What is the impact of weaker labour productivity?

Answer 28

• Low real wage growth because wage levels & their growth tend to be linked to productivity, marginal roduct of labour tends to = real wage rate
• Lower future GDP growth → lower living standards
• Weaker revenue for the government in the future because of lower economic growth → less resources for health & education services

Question 29

What are the causes of weak producivity?

Answer 29

• Weak company investment after the financial crisis in 2008
• Low-interest rates since 2008 have sustained ‘zombie companies’, i.e. companies that are using revenue to pay interest on large debt rather than for investment
• Real wages fell after 2007: companies kept hold of ‘cheaper’ workers rather than investing in new technology which is more costly
• Brexit? Uncertainty about UK’s trading relationship with the EU reduces investment and consumer spending – but impact only after 2016

Question 30

How has China’s Economic growth increased so much since the 1980s

Answer 30

• High levels of household savings of between 35% to 40% of disposable income generates resources for investment in infrastructure, technology & education
• Economic reform – role of incentives: state-owned enterprises moved into private sector and/or make decision-based on commercial reasons
• Productivity growth: 50% to 55% of economic growth explained by rises in labour productivity