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Economic growth causes_impact

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Economic growth causes_impact

  1. 1. Economic Growth – Causes and Impact EdExcel AS Economics 2.1.1 and 2.5.4
  2. 2. Fastest Growing Countries in 2015 19.33% 9.19% 9% 8.56% 8.33% 7.75% 7.59% 7.56% 7.46% 7.31% 7.23% 7.2% 7.13% 7% 6.86% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Papua New Guinea Congo Turkmenistan Ethiopia Myanmar Côte d'Ivoire Chad Bhutan India Lao P.D.R. Tanzania Cambodia Qatar Rwanda Kenya Real GDP growth compared to previous year (per cent), Source: IMF • Economic growth is a long-term expansion of productive potential • Short term growth is the annual % change in real national output • Long term growth is shown by an increase in trend or potential GDP and this is illustrated by an outward shift of long run aggregate supply Source: IMF
  3. 3. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2010 2011 2012 2013 2014 2015* 2016* 2017* 2018* 2019* 2020* GDPgrowthratecomparedtopreviousyear The chart shows real GDP growth for the UK from 2010-2014. Data for 2015 onwards shows forecast growth using data from the International Monetary Fund (IMF) Source: ONS The UK Economic Cycle in Recent Years
  4. 4. Short Run and Long Run Economic Growth Short term economic growth Cyclical changes in real GDP Changes in AD (C+I+G+X-M) Changes in short run AS Short term external shocks to both demand and supply Short term policy changes e.g. changes in interest rates Long run economic growth Potential output / trend growth Productivity of labour & capital Technological progress and strength of enterprise Changes in the labour force Investment rates
  5. 5. Key Factors Affecting Short Run Economic Growth Interest rates set by the central bank Fiscal policy - government spending and taxation Commodity prices such as oil, gas and foodstuffs Exchange rates Trading conditions in other countries Confidence of businesses and households
  6. 6. Short Run Economic Growth from Increasing AD General Price Level Real GDP GPL1 AS Y1 AD1 AD2 Y2 GPL2 An increase in AD causes an expansion of aggregate supply and a higher equilibrium level of national output (i.e. higher real GDP)
  7. 7. Key Factors Affecting Long Run Economic Growth Investment Productivity Labour supply Research Innovation Enterprise
  8. 8. Economic Growth using AD-AS Diagrams General Price Level Real GDP GPL1 AS1 Y1 AD1 Yp1 LAS1 A rise in a country’s productive potential is shown by an outward shift of long run aggregate supply (i.e. LAS1 to LAS2) This means a higher level of aggregate demand can be met because of an increase in the supply capacity LAS2 AS2 AD2 Yp2Y2
  9. 9. Economic Growth using PPF Diagrams Economic Growth A rise in a country’s productive capacity causes the PPF to shift out from PPF1 to PPF2 and this then allows increased supply both of consumer and capital goods. Capital goods Consumer goods PPF1 PPF2 A B C D Successful supply-side policies can help to bring about an outward shift of the a country’s PPF E F
  10. 10. Some of the Key Drivers of Economic Growth Economic growth Expanding the capital stock Increasing the active labour supply Extracting and selling natural resources Improving factor productivity Driving innovation and enterprise Economic growth is a sustained rise in a country’s productive potential and real national output The main drivers of long run economic growth are higher productivity and gains from innovation and rising real incomes for households
  11. 11. Linking Capital Investment to Economic Growth Injection of demand for capital goods industries Bigger capital stock can lift productivity / incomes Economies of scale & better competitiveness Investment helps to sustain export-led growth
  12. 12. What are the main Benefits of Economic Growth? Higher living standards – i.e. Real GNI per capita – helps to lift people out of extreme poverty and improve development outcomes (e.g. rising HDI) Employment effects – sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce inequality. Fiscal dividend – higher economic growth will raise tax revenues and reduce government spending on unemployment-related welfare benefits Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies. Better growth may attract foreign direct investment projects
  13. 13. Is there a Virtuous Circle of Economic Growth? Higher real national output (GDP) Increased capital spending Increased output per head (productivity) Increased wages / real incomes for people Rising consumer spending on goods and services
  14. 14. Benefits from Growth driven by Technological Change A rise in productivity • Higher GDP per worker • Lower unit costs • Higher wages • Higher profits New Goods and Services • Lower real prices • Consumer welfare gains (lower prices) • Improved living standards Improved health • Healthy life expectancy • Labour force expands • Increased productivity
  15. 15. Three Perspectives on Economic Growth Balanced Growth Sustainable Growth Inclusive Growth Sector balance e.g. between industries Meets the needs of current generations without limiting resources for future generations Benefits of growth widely distributed • Regional balance Rising median per capita incomes • Urban / rural balance Macroeconomic stability Progress in reducing relative poverty • Internal v external balance (e.g. BoP) Financial stability Improving opportunities for all groups • Balance between consumption and investment Environmental sustainability – protection of natural capital Measures to tackle discrimination and barriers for affected groups
  16. 16. • Many African countries feature in a league table of the world’s fastest growing countries both in recent years and in the forecast • What factors have contributed to rapid economic growth? Rapid Economic Growth in Africa
  17. 17. • What factors have contributed to rapid economic growth? 1. Improvement in the terms of trade – higher commodity prices have boosted export revenues for many countries 2. Improved governance – wider spread of democratic governments allied to improved institutions e.g. more countries are able to issue bonds 3. Strongly increasing foreign direct investment – especially in agriculture, mining, oil and gas, infrastructure, hotels/restaurants 4. Increasing intra-regional trade including manufactured goods – emergence of key African regional trade hubs bolstered by infrastructure spending 5. Improved macroeconomic management – lower inflation, more credible central banks, improved fiscal balances 6. Rising per capita incomes – growth of consumer markets – poverty rates continue to fall but social progress has been uneven 7. There is some evidence that a growing number of African countries are becoming less dependent on primary commodities and building a more diversified manufacturing / services base for their economy. Analysing Causes of Economic Growth in Africa
  18. 18. Building Trust / Social Capital Growing Intra-Regional Trade Improving Institutions Growing a Dynamic Private Sector Sound Macro Policies to control inflation Focusing on addressing Equity / Fairness How Best to Sustain Economic Growth in the Long Run
  19. 19. Attractive rates of corporation tax Soft loans and tax reliefs / other subsidies Trade and Investment Agreements Flexible labour markets Special Economic Zones High quality infrastructure Open capital markets to allow remitted profits Availability of low cost labour Many countries rely on foreign direct investment (FDI) as a key source of extra demand and as a driver of growth Policies to attract Inward Foreign Investment
  20. 20. High rates of GDP growth can bring about undesirable economic and social costs – much depends on the nature of growth Risks of higher inflation and higher interest rates • Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives • The central bank may decide to raise interest rates to control inflation Environmental effects • More negative externalities such as pollution & waste • Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources Inequalities of income and wealth • Rapid increases in real national income can lead to a higher level of inequality and social divisions • Many of the gains from growth may go to only a few people Economic and Social Costs of Growth
  21. 21. Greenhouse Gas and C02 Emissions in the UK Greenhouse gas emissions in the UK from 2001 to 2014, (in million tonnes carbon dioxide equivalent) 725 704 711 706 697 690 677 657 599 613 566 582 568 520 568 550 561 561 558 556 547 533 482 501 458 476 467 422 0 100 200 300 400 500 600 700 800 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* Milliontonnescarbondioxideequivalent Greenhouse gas emissions Carbon dioxide emissions
  22. 22. Recent Economic Growth in the BRIC Countries Source: HM-Treasury Databank Brazil Russia India China Year Per cent Per cent Per cent Per cent 2007 6.0 8.5 9.8 14.2 2008 5.0 5.2 3.9 9.6 2009 -0.2 -7.8 8.5 9.2 2010 7.6 4.5 10.3 10.4 2011 3.9 4.3 6.6 9.3 2012 1.8 3.4 5.1 7.8 2013 2.7 1.3 6.9 7.8 2014 0.1 0.6 7.2 7.4 2015
  23. 23. Main Sources of Economic Growth in China China has experienced rapid growth over the last twenty years helping to lift hundreds of millions of people out of deep poverty • Real GDP growth in China has been over 9% per year since 1979 • 60-70% has come from increasing capital and labour inputs – there has been a vast increase in capital investment spending • 30-40% has come from rising factor productivity (i.e. increasing efficiency in the allocation of labour & capital resources) • Looking at increases in per capita output research finds that: 1. 11-14% from improving human capital (quality of labour) 2. 8-14% from improving allocative efficiency (e.g. moving from state-owned businesses to private and from rural to urban) 3. 16-17% has come from the productivity-enhancing effects of innovation – much of which has been the imitation of ideas
  24. 24. Growth Challenges for China in the Years Ahead China is now in a period of transition away from the fast export and investment-led growth of the last 20 years. The service sector is likely to take a bigger share of GDP in the years ahead. In 2014, it still accounted for less than 50 per cent of Chinese national output. Chinese Reform Challenges 1. More reliance on their own domestic market and less on exports 2. Raise consumption and reduce inefficient savings 3. Grow the private sector and reduce distortions from state-owned sector 4. Increase the pace of innovation as imitation limits are reached 5. Continue to integrate the Chinese economy into the global economic / financial system. This includes many more Chinese firms going 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ShareofGDP Agriculture Industry Services
  25. 25. Some Key Constraints on Economic Growth Infrastructure Gaps Primary Export Dependency Macroeconomic Instability Endemic Conflict and Corruption Human Capital Weaknesses Insufficient Private Savings Natural Capital being Depleted Rising Income Inequality Although many developing countries have enjoyed rapid growth in recent years, for others there are crucial growth constraints
  26. 26. Savings Gaps: Importance of Savings and Investment Increase national savings Increase in net investment Larger capital stock Rise in real GDP / GNI Increased per capita incomes How a savings gap can limit economic growth: • In many smaller low- income countries, high levels of extreme poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund capital investment projects. • This increases reliance on tied overseas aid • Some countries borrow heavily to fund capital investment projects – this can lead to a high level of external debt
  27. 27. Deficiencies in Human Capital as Barrier to Growth Human capital weakness limits the positive impact of capital investment Investment increases the size of the capital stock and helps to achieve “capital deepening” (more capital per worker) but businesses need skills and experience to make best use of new technologies In many countries there are acute shortages of human capital Some countries lose some of their skilled workforce to other countries through a brain drain Investment in education and training to increase the quality of the labour force and make people more flexible in the labour market
  28. 28. Economic Growth – Causes and Impact EdExcel AS Economics 2.1.1 and 2.5.4

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