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    PPT - GDP Growth

    Economic Growth

    • An increase in the capacity of an economy to produce goods and services over time #testanswer
      1. Potential Growth - the rate of increase in the capacity of the economy to satisfy the needs and wants of people in an economy
      2. Actual Growth - the rate of change in real gross domestic product over a given period of time
    • Relates to Australia's macroeconomic objective of sustainable economic growth
      • i.e. growth that can be maintained over a long period of time - a rate of $3-4%$ in GDP

    PPF model

    Actual Growth
    • If an economy is operating inside its PPF and produces more as a result of using previously unemployed resources, or using resources more efficiently, this is referred to as actual growth
      • This is illustrated by a movement from a point within the PPF to a point towards or on the PPF
      • Demand Side
    Potential Growth
    • The productive potential of an economy may be increase by an increase in the quality and/or quantity of resources and, when this occurs, it is known as potential growth
      • i.e. growth in the capacity to produce more
      • Supply Side

    Measuring economic growth

    • The economic growth rate is the rate of change in GDP

      • GDP: the total market value of all final goods and services produced in a country during a certain time period
      • Nominal GDP is expressed:$$\frac{GDP(b)-GDP(a)}{GDP(a)}\times 100$$

    • We should refine GDP by taking into account inflation

      • This is real GDP and is simply nominal - the inflation rate

    • Refining further, we take into account population to have Average real GDP per person known as Real GDPpc

    Limitations of GDP

    • Income Distribution
    • True value of public goods and merit goods is largely unknown
    • Does not account for hidden economies or non-market production
    • Understates changes in utility (ability of goods and services to satisfy wants)
      • Doesn't capture significant technological progress that increases utility without increasing price by much
    • Does not describe non-material welfare
    • Does not account for rising productivity

    Determinants of Economic Growth

    Potential Growth

    Population Growth

    • Increase the total size of the economy; greater demand for G+S and productive factors
    • Increase in size of the labour force - migration but also natural
    • Migration more than natural: migration promotes transfer of wealth, knowledge and skills and positive fiscal impact (tax revenue)

    Labour Force Participation

    • Proportion of people over 15 years old who are in paid work or actively looking for work
    • Higher involvement at work, increasing the capacity of production
    • Government tax revenue increase

    Rising labour productivity

    Capital Deepening
    • The amount of output produced per hour worked
      • Capital Deepening: more technology used, increase in the stock of capital relative to other productive resources
    • Production becomes more capital intensive, increasing labour productive
      • technology changes and improvements of function which help to increase the level of output
    Multi-factor Productivity
    • All other factors that improve a worker's ability to produce goods and sergices (not capita)
      • Changes in human capital: knowledge and skills that workers develop through education and experience

    Actual Growth

    Factors affecting spending in the economy

    • Consumption
    • Investment
    • Government Expenditure
    • Net Exports (Exports less Imports)

    Benefits and Costs

    Benefits

    • Increased material standard of living

      • Increased quantity of goods and services
      • Satisfy more wants and needs

    • Increase level of real income

      • How much money an individual or entity makes after accounting for inflation
      • Satisfy more needs and wants with increased level of income

    • Reduce unemployment

      • Growth is clearly likely to stimulate demand for labour, and it is likely that more people will be employed and fewer unemployed

    • Improved Efficiency

      • Promote knowledge, skills, productivity and tech changes which leads to higher quality of goods ands services

    • Fiscal Dividend

      • Rising income will lead to higher taxation revenue which can be used for public and merit goods such as infrastructure and health
      • Public and merit goods generate considerable external benefits. More hospitals and schools mean a healthier and better-educated population, which generates other economic benefits in terms of effectiveness of the labour force

    Costs

    • Structural Unemployment
      • From structural change: when people want a new type of G+S and when inventions and the such make it possible also when businesses seek to reduce costs
    • Inflationary pressure
      • When resources are fully employed and the economy is working near its capacity
    • Environmental Degradation
      • As production and consumption increase, negative externalities are likely to arise, as well as the likelihood of increased depletion of non-renewable resources
    • Social Dislocation
      • High rates of growth may lead to crimes, stress suicide.