Economic Growth By Joe Patton

Measuring Economic Growth
1. HDI
  1. Better for measuring living standards because it takes into account 3 main areas of living standards - education, health and earnings. It measures life expectancy, literacy rate and GDP/capita and gives a result between 0 and 1. The results are internationally comparable
    1. GDP/capita PPP = taking into account different costs of living
      1. adjusted for exchange rate
2. GDP
  1. Gross Domestic Product is the total value of all output in the economy over a given period of time. Figures are produced every quarter
    1. Real GDP measures the value of goods and services produced within the economy adjusted for inflation
      1. National output has to be above inflation for us to see real economic growth
      2. GDP does not measure the sustainability of the growth. It is a measure of economic activity, rather than a projection method, which means it could be due to unsustainable overuse of resources or poor allocation of investment.
  2. 3 ways of measuring GDP - by output, income or expenditure - all should give the same result
3. PPF
  1. GDP vs PPF
    1. GDP measures short run growth - fluctuations in the economic activity (actual GDP) whereas shifts in the PPF measure long run growth (trend GDP)
  2. The maximum combination of goods that a country produces when an economy is working at its full capacity
Circular Flow of Income
1. The outer flow is the financial flow - it is measured in monetary terms. The inner flow is a physical flow. The flows run in opposite directions showing the payments received for the supply of labour and goods. Each payment represents an income for another agent.
  1. Firms pay households wages for the labour factor of production. Households then use this to consumer domestically produced goods and services
    1. Any income not spent on consumption is a withdrawal - savings, taxes and imports.
      1. Savings enter the financial sector and banks use these funds to lend to other households (loans) or firms (to fund investment)
        Investment is capital spending by firms to increase their ability to supply goods and services. Investment is an injection as it represents an increase in income in the economy by increasing the profits of firms
      2. The value of withdrawals always equals the value of injections
Link bewteen income and wealth
1. Income is a flow of factor incomes such as wages and earnings from work; rent from the ownership of land and interest & dividends from savings and the ownership of shares
  1. Wealth is a stock of financial and real assets such as property, savings in bank and building society accounts, ownership of land and rights to private pensions, equities, bonds etc.
    1. PPF's
      1. PPF
        The shift outwards of the PPF is economic growth - an increase in the quantity and/or quality of the factors of production which increases total potential output
        An economy can operate inside the PPF if there is spare capacity. Moving from a point inside the PPF to a point nearer the boundary incurs no opportunity cost
        Increases in GDP
        Economic growth - long run growth - increases in the productive potential of the economy - shift of the whole PPF outwards
        Economic Recovery - short run growth - fluctuations in GDP resulting from changes in the level of economic activity - movement from a point inside the PPF to one nearer the boundary
        GDP may fall if the PPF shifts inwards or because the economy is making less effective use of resources available
        Unused resources - spare capacity - unemployment of resources
Economic Cycle
1. Output gaps are the difference between the actual level of GDP and the trend rate of growth
  1. Positive output gaps in a boom, negative output gaps in a recession
    1. Sustainable growth rate - ironing out the booms and recessions (Gordon Brown) as these have negative overall impact on living standards
      1. The smaller the output gap the smaller the impact
    2. 5-8 years in between
  2. As the negative output gap widens, unemployment rises. As the positive output gap widens, unemployment should fall to below 0 theoretically indicating a shortage of labour and a need for migrants
    1. Negative output gap = spare capacity
2. Trend rate of growth
  1. 2.5%
  2. Determined by improvements in the supply side capacity of the economy, such as availability of the factors of production, capital investment etc. all things that shift AS to the right.
3. Unemployment is the last factor to change therefore it cannot be used as an indicator as there is a time lag
  1. During downturns, companies streamline and cut inefficient people
4. Changes in level of GDP VS changes in the rate of growth of GDP - Level of GDP still rises even if the economy is growing at a slower rate, as long as growth is positive
Causes and constraints of growth
1. Benefits of growth
  1. We can tackle our existing problems more easily because we have the increased resources to do so
  2. If we encounter a new problem, having growth will make it easier to cope with, because we will have more surplus to devote to the problem
  3. Without growth it is hard to improve the world we live in
  4. Careful monitoring and action by the gov can put right any undesirable side effects of growth
  5. Economic growth leads to more employment therefore increased tax revenue means gov spending increases, infrastructure and public services improve, consumption increases and AD shifts out more
    1. Spending on merit and public goods
  6. Consumer and business confidence rises
    1. Investment and consumption increases
  7. Increased profits for firms
  8. Economic growth leads to higher level of education and health service. This will result in a better social structure with a more stable political setup
2. Costs of growth
  1. Balance of payments problems - we have a deficit due to import too much. Also other countries benefit due to our increased imports of consumer goods and raw materials
  2. difficulty measuring/changes over time/costs outweigh benefits?
  3. Blind pursuit of economic growth often means we ignore the real problems we face
  4. Interest rates rise to encourage saving
  5. Income inequality - increased relative poverty
  6. Shortage of labour, immigration increases - pressure on services
  7. Negative externalities damage our social welfare and the environment
  8. Could lead to structural unemployment due to structural changes in the economy
3. CONSTRAINTS OF ECONOMIC GROWTH
  1. Absence of capital markets/financial structures prevent borrowing - no investment - no growth
  2. Unskilled labour - can only do basic jobs - unproductive - they are needed but they don't help growth
  3. Migration to other countries - brain drain effect - labour shortages - many dependents - slowed growth, Evaluation - remittances, new skills when they return, job opportunities for those who stay, less pressure on services
  4. War - spending on defence increases - less spending on public/merit goods. Also resources and infrastructure are destroyed, lots of money needed to restore everything. Loss of life means less labour
  5. Geographical location may make growth very hard due to lack of trade possibilities e.g. landlocked countries
  6. Dependence on imports leads to a current account deficit - not export led growth
4. Improvement in the quality or quantity of the factors of production
  1. Land
    1. Discovery of new resources such as fuels or minerals
      1. Access to energy - North Sea oil and gas in 1980s
      2. Technological improvements in extracting these resources
    2. Use of higher yield methods
  2. Labour
    1. Immigration - larger workforce - increased productivity - selling more - increased GDP. Evaluation: leakages from remittances sent home, however there are also injections from British workers abroad sending money home. A very small % of migrants do not contribute to the economy - they give more than they receive
    2. Migrants arriving /increases in the birth rate /increase in the retirement age
  3. Capital
    1. Investing in machinery - productivity increases, therefore GDP rises. Evaluation: productivity rises faster, however this won't reduce unemployment
      1. Capital accumilation
    2. Innovations in productive technologies
  4. Entrepreneurship
    1. Innovation - Improvement in technological processes
      1. Need investment for innovation
    2. Research and development
    3. More extensive and successful training for managers
5. To get out of this recession we need small businesses to develop, but because large companies like Amazon are monopolizing the market, the small businesses get driven out of business
An increase in the productive capacity of the economy
Poverty
1. Relative poverty measures the extent to which a household’s financial resources falls below an average income level.
  1. Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services.
Macro = the study of economic activity on a national or global scale
1. Large scale processes which determine wealth and the mechanisms through which it can be shared by economic agents
  1. Consumers, firms and gov
    1. Each behaves in a way which maximises welfare - i.e. behave rationally
      1. Consumers aim to maximise utility
        Workers aim to maximise wages
        Firms aim to maximise profits
        Trade unions aim to maximise the welfare of their members
        The government aims to maximise social welfare - total utility of all members of society

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