Economic Growth

Economic Growth

1. Growth Concepts

   • Nominal GDP
     • The value of all goods and services produced in a year, measured in current-year dollars.
   • Real GDP
     • Nominal GDP adjusted for changes in the price level. It shows if actual production has increased.
     • Nominal GDP / Price Index x 1000
   • Three measures of eco growth
     • Productive capacity
       • Shows if the country is able to increase the production of goods and services so real production and real incomes can increase in the future.
         • It does not show if more is actually being produced.
     • Real income
       • Same as Real GDP. If more goods and service are being produced, then more income is being earned and more G&S's can be bought.
         • It does not show:
           • What is actually being produced.
           • How equally the income is distributed.
           • The impact of the environment
           • How much is undeclared or illegal
           • How evenly the wealth is distributed.
     • Net social welfare
       • Includes eco and non-eco factors.
         • Eco factors - the value of goods and services being produced.
         • Non-eco factors includes environmental impact and welfare of public
           • Can be difficult to measure so conclusions are distorted.

2. Impacts of Growth

   • Impact of eco growth on different sectors of the economy
   • Benefits
     • Increased production
     • Increased investment
     • More jobs and more employment
     • Higher incomes
     • Increased savings
     • Higher tax revenue for the government
     • More public goods and lower public debt
   • Negative Effects
     • Resource depletion
     • Increased pollution
     • More pressure on the environment
     • Higher costs of compliance
     • Higher levels of stress
     • Traffic congestion
     • Overcrowding in tourist areas
     • Uneven impact
     • Inflation

3. Growth Models

   • Production Possibility Frontier
     • Definitions
       • Consumer Goods - Final goods and services that are used by consumers.
         • Clothes, Televisions, Holidays
       • Capital goods - Manufactured goods which are used to make other goods or provide services.
         • Bus, Road, Factory
       • Physical Capital - Manufactured goods used in production
       • Human capital - Abilities of employees that come from training
       • Savings - Households don't consume so that they can spend in the future.
       • Investment - Businesses buy capital goods to produce or provide services
     • Assumptions
       • There is a fixed level of technology
       • There is a fixed quantity of resources
       • When these change, PPF shifts
     • Movements
       • Economic growth can be defined as an increase in productive capacity or in production
         • Productive capacity - More resources or better technology shifts the PPF outward.
           • New technology or resources applying to both goods shifts the curve outwards.
           • New technology applying to only one good shifts the curve outwear on one side only.
         • Production - More resources employed will increase the output of goods meaning the dot moves closer to the curve.
     • Forgoing current consumption - produce less consumer goods and more capital.
   • Circular Flow Model
     • Households
       • Sell their resources to producers for income
       • Spend income on consumption and save.
     • Producers
       • Buy household resources.
       • Import goods from overseas
       • Give indirect tax to the government
       • Borrow funds from financial institutions.
     • Government
       • Collect direct tax from households
       • Collect indirect tax from businesses
       • Use taxes to fund spending
     • Overseas
       • Pays producers for exports
       • Provide imports in return for import payment
     • Financial
       • Receive savings from households and pays interest in return
       • Lends funds to firms in return for interest
     • Injections
       • The factors which will increase economic activity for example increases in:
         • Investment (!)
         • Government Spending (G)
         • Exports (X)
     • Leakages
       • The factors which will decrease eco activity for example increases in:
         • Savings (S)
         • Taxation (T)
         • Imports (M)
   • AD/AS
     • An increase in AS causes growth
       • C increases if incomes rise, income taxes fall, interest rates fall or inflationary expectations rise
       • I increases if interest rates fall or business confidence rises
       • G rises when the government decide to increase spending in the budget
       • X increases when the exchange rate falls or as eco growth and incomes of trading partners rise
       • I decreases when incomes or the exchange rate in NZ falls
     • An increase in AD causes growth
       • Fall in COP
       • Increase in productivity
       • A fall in nominal wages
       • A fall in the price of oil
       • An appreciation of the exchange rate