Costs of Economic Growth

Negative Externalities
1. EVALUATION
  1. Innovation means they can be ommitted
    1. Micro Example
      1. We all have catalytic converters in our cars
  2. Government Regulations
  3. There are also positive externalities
2. Acid Rain in the UK in 1980s affected forests in Germany, Sweden and Norway
3. Noise and Visual Pollution
  1. Pollution is trans-boundary so it affects the whole world
    1. Countries like China who prioritise growth over the environment have a permanent layer of smog over them
    2. Air pollution increases due to more transport of materials as production increases and also due to great trade.
    3. International tensions when the USA did not sign the Kyoto Agreement because their pollution affects the whole world
Inflation
1. As AD shift outwards, the result is a rise in GDP to a certain extent, after which any shifts are mainly inflationary
  1. Price level rises
    1. Interest rates rise to encourage saving and stop people from spending so much and decrease the demand-pull inflation
      1. There is more hot money in the UK. Hot money is the money which investors move from account to account (usually in several different countries) trying to get the highest short-term interest rates possible
      2. House prices and rents rise due to increase demand from migrants and limited supply
      3. Monthly repayments on loans and mortgages rise
      4. Cost of borrowing rises and reward for saving rises
      5. Evaluate Mark Carney's policies
        His policy is to keep interest rates at 0.5% until unemployment falls below 7% (as long as inflation remained under control). There are 3 knockouts, any of which will cause the deal with unemployment levels not to hold. When one of these has been achieved, the interest rate will not definitely go up, instead it will be reconsidered by the MPC.
        The first knockout is if the MPC judges that CPI inflation in 18-24 months will be above 2.5%.
        More than 0.5% above the inflation target
        The second is if medium-term inflation expectations “no longer remain sufficiently well anchored”.
        I think this means that the forecasts for 5-10 years need to still be "valid" in a sense of likelihood and be relatively accurate.
        The third is if the bank’s financial-policy committee judges that keeping interests rates at 0.5% will have serious effects on financial stability and there is nothing else the bank can do about it.
    2. There is more confidence in the £ so there is higher demand for it. The £ gets stronger.
      1. Higher UK price level means foreign goods become more competitive so we import more
        Countries are more confident to trade with us due to our economic growth so they export more to us
        EXCHANGE RATE
        As we import more, consumer choice increases and living standards also increase
      2. Our exports become less competitive in the global market so we export less
        This affects our balance of payments and puts us into a current account deficit
        Due to economic growth we have a current account deficit. This means that some countries have to have a current account surplus. This causes international tensions.
      3. The Bank of England might want to print more currency to satisfy demand. This is inflationary as the currency decreases in worth.
        Over-heating economy
        the economy overheats if AD is increased when the economy is already at its full productive potential, resulting in increasing inflation with little or no increase in output
        If the Bank prints more money, production will still be the same, just people will have more money, so demand will rise and producers will raise their prices, hence printing money is inflationary because there is an increase in the supply of money but it is not supported by GDP growth. People have more money, but if everything is more expensive they are no better off. The greater the extent to which this is done, the worse the situation becomes. E.g. in Germany there was hyperinflation because people kept getting more money, producers kept raising prices and eventually the currency became worthless. Once consumers realize what is happening, they expect inflation. This causes them to buy more now to avoid paying a higher price later. This boosts demand, causing inflation to spiral out of control. The only winners in hyperinflation are those who borrowed before the hyperinflation. They find that higher prices makes their debt worth less by comparison, until it is virtually wiped out.
        INFLATION
        Monetary Inflation
  2. Upward pressure on prices causes demand-pull inflation
Macroeconomic Goals
1. Control Inflation and Interest Rates
  1. Stable prices - low inflation (current target 2%)
2. Sustainable Economic Growth
  1. Measured by Real GDP
    1. MEASURES OF GDP
  2. Reduced Environmental impact of Growth
  3. ECONOMIC GROWTH
    1. AGGREGATE DEMAND AND SUPPLY
      1. Aggregate Demand
        Consumption
        CONSUMPTION AND SAVING
3. Low Unemployment
  1. Aiming for full employment
4. Ensure high standards of living and equality
  1. Rising living standards and a fall in relative poverty
  2. Cutting child and pensioner poverty
5. Sound government finances
  1. Sustainable position of Balance of Payments
    1. BALANCE OF PAYMENTS
  2. Balance between government borrowing and spending, also control over the national debt
6. Improvement in productivity
  1. More competitive in global trade
  2. Pressures of globalization and increasing competition within the European Single Market has made this a key government objective
Commodity and raw material prices rise
1. Countries purchase more land
2. E.g. China's industrialization - demand for oil shifted outwards and since resources such as oil are finite, the prices rose worldwide
Development in quaternary industries - more innovation, more research and development
Higher Inequality
1. Wider gap between the rich and the poor causes tensions in society
2. Rich get richer and the poor get poorer - increasing poverty
  1. Evaluation: Certain amount of regulation through taxes
3. Evaluation: Measured in quintiles - comparing the poorest 20% to the richest 20%
4. Uneven distribution of the benefits of economic growth
  1. Most of the benefits go to London
  2. Existence of regional zones means that there are peripheral zones which are marginalised
    1. Known as Growth holes in LEDCs
    2. Causes internal migration
      1. Overpopulation in certain areas and pressure on services as demand increases
        Government spending increases
        Public Services improve
        Welfare state increases. This may cause higher dependency on benefits
        Better Infrastructure - higher standard of living for everyone
        MULTIPLIER EFFECT
Shortages of labour
1. Encourages Immigration
  1. Domestic unemployment might rise
    1. UNEMPLOYMENT
      1. There are 4 types of unemployment
        Seasonal
        When one has a job where it is common to only work during certain seasons. It occurs because the demand for some workers varies widely over the course of the year. It is viewed as less problematic than structural unemployment because the demand for seasonal skills is only temporary.
        Cyclical
        This unemployment is associated with downturns occurring in the economy. During recessions, demand for goods and services falls so some companies cut production and fire workers rather than by reducing wages and prices. There is a larger supply of labour than there is demand - unemployment. As an economy recovers from a recession, cyclical unemployment tends to naturally disappear. As a result, economists usually focus on addressing the root causes of the economic downturns themselves rather than how to correct cyclical unemployment.
        Demand-deficient unemployment
        caused by short-run fluctuations in aggregate demand
        rises rapidly during recessions
        Structural
        When changes occur in market economies (business activity) and demand changes for different skills resulting in a mismatch between the skills of workers and the jobs available. Some industries have a surplus of labour supply while others face a shortage. This might occur during industrialization or deindustrialization. Structural unemployment is thought to be a pretty significant problem, mainly because structural unemployment tends to be largely of the long-term variety and retraining workers is not a cheap or easy task.
        Technological unemployment - when physical capital replaces human capital
        E.g. Mining - there was a decline in mining due to deindustrialisation. Jobs were lost in primary and secondary sectors, and jobs were created in the tertiary sector but redundant miners didn't have the right skills to take those jobs
        Long term unemployment may result from structural or technological unemployment
        This tends to be concentrated in areas traditionally associated with a particular industry causing geographical unemployment
        Frictional
        When workers are between jobs, either because they have quit their old job or because they have been fired. Some may have find new jobs before they leave their old ones, others may not have found other work yet. These workers have to look for a suitable job, which can take a while. During this time, the individual is considered to be unemployed. Frictional unemployment is only short term because workers will easily find another job in the same field, particularly since technology makes the job search process more efficient.
        It can also occur when students move into the work force for the first time, when an individual moves to a new city and needs to find work, and when women re-enter the work force after having children. (Maternity leave doesn't count as unemployment!)
        Costs of Unemployment
        To Local Communities
        To the Unemployed
        Loss of income.
        The worker receives benefits to offset this
        Extra leisure time which they have at their disposal.
        The stigma (disgrace) of being unemployed
        Many feel degraded by the process of applying for benefits and not being able to support their family
        high stress levels, martial breakdown, suicide, physical illness, mental instability and higher death rates
        For the short term unemployed, the costs are relatively low. The social and psychological costs are limited and few are seriously affected financially because loss of earnings is low. The large redundancy payments mean some may have benefited from losing their job.
        Long term unemployed – the longer the person is unemployed the less likely it is that they will find a job.
        Being unemployed reduces the human capital of workers. They lose skills and are not being trained in the latest developments of their occupation.
        Employers use length of time out of work as a crude way of sifting through applicants. To an employer, unemployment is may mean the applicant is deskilled, thus creating a fear that the worker is incapable or working, is disruptive or has personality problems. It shows that other employers have turned this applicant down for previous jobs, and thus the rational behaviour is to save time and not consider the applicant for the job. The long term unemployed are in a catch-22 situation. They can’t get a job unless they have recent employment experience, but they can’t get recent employment experience until they get a job.
        To the economy
        To the taxpayer
      2. Underemployment
      3. Voluntary/Involuntary
        Some choose not to work at the current wage rate - everyone above the equilibrium point on the supply curve is voluntarily unemployed
        LABOUR MARKET
      4. Definitions
        The unemployed - those who are willing and able to work, without a job but who are seeking work. The unemployment rate - the number of people out of work at a point in time. Unemployment will fall if the number of workers gaining jobs is greater than the number of people losing jobs. Unemployment will rise if there the number of people seeking jobs rises but the number of jobs stays the same.
      5. Measuring Unemployment
        Claimant Count (CC)
        Counts the number of people claiming unemployment benefits. To be eligible for these benefits in the UK, a person has to be actively seeking work
        International Labour Organisation (ILO) Labour Force Survey (LFS)
        Surveys 60,000 households
        Produces a higher figure
        Usually given as a figure or a percentage of the workforce. A % is more useful when comparing unemployment in different countries where populations and workforce size may vary and also over time where the population and its structure may have changed
  2. Take unskilled jobs that British people do not want to do therefore unemployment might not be affected
  3. Contribute to taxes and GDP, they often contribute more than they cost us in benefits as many come here willing to work because of the possibility to earn more money, few come to exploit our welfare state
  4. Brain drain effect for the migrants' home country - economic slowdown; might affect trade with us, however they have a positive balance of payments due to remittances sent home
    1. negatively affects our balance of payments - our "imports" rise
2. Stay at home people return to work
  1. Higher costs for firms as they need to train more people

Media attachments

demand_pull_inflation.gif (image/gif)

Next up

Costs of Economic Growth

Description

Resource summary

Media attachments

Similar

	Created by Kati Christova about 10 years ago