Introduction:
Short-run goals:
- Smooth out fluctuations in level of economic activity
- Aim to attain full employment without inflationary pressures
- Open economies also need to look at balance of payments (BOP) and exchange rates
Long-run goal:
- Attain healthy growth rate
- Bring about improvement in living standards and economic welfare
Economic Growth:
The annual percentage increase in an economy’s level of real output over time
Actual economic growth:
The annual percentage increase in national output
- Sustained by increasing Aggregate Demand (AD) in the short run
Potential economic growth:
The annual percentage increase in the economy’s capacity to produce
- Needed to sustain actual growth in the long run
- Reflected by outward shift of PPC, or rightward shift of Long Run Aggregate Supply (LRAS)
Measured by:
- The rate of growth of real GDP over time
- The % change in the nation’s real national income over time
Causes of Actual Growth:
Main factor is aggregate demand
- Increase in any component will increase real output, provided economy is under full employment
- Limited by increase in spare capacity
Causes of Potential Growth:
Capital Accumulation
- Increase quantity and improve quality of capital equipment
- Funds needed can be obtained from savings and FDI
- Increases productivity
Investment in Human Capital
- Human capital: the accumulated skill and knowledge of workers
- Most fundamental source of economic growth
- Acquired through education, training, and work experiences
- Increases productivity
Foreign Trade and Investments
- Provides local industries access to overseas markets
- Provides a source for importing the necessary inputs needed by domestic markets
- Help to establish new industries
- Provide a spur to economic growth for many developing countries
- Encouraged by tax holidays for 10-15 years in Singapore
Technological Advancements
- New ways to get more out of same resources
- Increases productivity of resources
- Both human and physical capital increases necessary to reap these benefits
Research and Development
- Basic research: search for knowledge without regard to how the knowledge will be used
- Applied research: Answer particular questions or apply scientific discoveries to the development of scientific products
- Aims to improve productivity through technological discovery
Dynamic Entrepreneurship
- Contributes by looking for new markets and new methods of production
Benefits of Economic Growth:
Increased Levels of Consumption
- Higher real income, unless outstripped by population growth
- Increased purchasing power, consumption increases, promotes social welfare
More Equitable Income Redistribution
- Progressive tax system: taxes increase when income increases
- More tax revenue, more spending on social welfare programmes possible
Reduces Unemployment
- Actual economic growth involves increase in real output, leads to increase in level of employment
- Increased AD reduces cyclical unemployment
- Potential growth reduces structural unemployment
Environmental Benefits
- Consciousness increases with increase in affluence
Costs of Economic Growth:
Reduced Current Consumption
- Investment is important source of economic growth, for investment, there must be savings, for savings, current consumption is sacrificed
Worsen Income Redistribution
- Low skilled workers may be replaces by machines as their skills and knowledge do not improve as quickly as technological advancements
- Compelled to take on lower paying jobs when they get retrenched
- Greater incentives may be given to specific sectors of the economy to encourage more investment, widening the income gap
Environmental Pollution
- Rapid industrialisation leads to deterioration of the environment such as air and water pollution, industrial noise and stench, congested cities and traffic jams
Depletion of Natural Resources
- Depletion of non-renewable resources
- Present growth may lead to insufficient resources for future generations unless viable alternatives can be found for minerals and fossil fuels
