Economics, 6th ed., 2016, Prof. Dr. P. Zamaros presentation19 growth
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Devel elopment opment Development refers to the increase in living conditions and any improvement thereof based on three core values that include sustenance, as the capacity of economy to meet the necessities of • its people self-esteem ” as the quality of life • freedom from servitude, that is freedom from poverty • Metrics: HDI
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Indicators
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Comparative
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Grow owth Unlike development, growth refers to the degree by which an economy’s national output increases over time as a result of an increase in the quality and quantity of resources. Metrics: GDP, GNI Economic growth is therefore the long-term expansion of the productive potential of the economy = the expansion of PPF (since this limit shows the max productive capacity of an economy considering the efficient use of its resources)
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Growth as the outward expansion of the production possibility frontier is a long-term and potential process: it is about the shift of the LRAS curve (in real terms). The shape and the assumptions underlying the LRAS depend on the perspective taken, whether Keynesian or Monetarist/Neo-Classical or Relational
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Under the Monetarist/Neo-Classical perspective, the long-run the productive capacity of the economy is independent of prices while dependent on the quality and quantity of resources, hence is perfectly inelastic. Therefore, economic growth can be seen as the rightward shift from LRAS1 to LRAS2:
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros In the Keynesian tradition there is economic growth when there is an increase in the factors of production and output, hence a shift from LRAS1 and LRAS2:
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Since both perspectives consider economic growth in the same manner, they consider that there is economic growth when an economy manages to increase its industrial base and thus its factors of production, and at the same time its output or output per capita. In a simple manner, there is economic growth when the citizens of a nation become wealthier. However there is a condition attached to this: that the distribution of income is carried out equally, which is far from the being factually the case.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros In the Relational Approach, there is more to be critical about the theories on growth and development: an economy does not operate at the level of the PPF. The usual explanation that traditional approaches give is inefficiency; both approaches will then suggest ways for rendering the economy optimally efficient which at are bottom-line unfeasible. Thus since the state of the economy is factually less than optimally efficient, the rightward expansion of the PPF from LRAS1 to LRAS2 implies a rightward shift from ALRAS1 to ALRAS2.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros How this shift will occur will depend on the state of the economy and its management abilities
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Thus the Relational Approach offers a number of possibilities a/ A rightward shift in ALRAS without a change in LRAS Productive efficiency may boost SRAS thus improve ALRAS but not changing LRAS b /A rightward shift in LRAS to improve ALRAS e.g. GR: housing the 2004 Olympic Games, which affected the Greek GDP, did not necessarily render the economy more competent to use its resources optimally: the dilapidation of the Olympic structures themselves is testament that the economy did not improve the management of its resources.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros c/ A change in the differential between LRAS and ALRAS Following the expansion of the PPF, the difference between potential and actual output might be larger – as shown in the diagram where G2 > G1 where the gap is getting bigger indicating increased inefficiency. This depends on 1/ the growth strategies of the firms within the major industries of an economy; 2/ their willingness to operate more efficiently, which might not be strategically the best option for them
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros But the gap can also be the result of how the LRAS is estimated
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Short term grow owth Growth in the short term often evoked by politicians and journalists can be looked at in two ways. As demand side growth, that is, a shift in the AD expressed as the annual % change in GDP, which is the growth rate. Growth rates include: Negative growth (<0%) • Low (0-2%) • • Moderate (3-5%) • Important (6-10%)
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Growth as the rightward shift of the AD is the result of an increase in C: fall in the rate of interest, or increase in wages • I: increased savings, stock purchases and entry in new markets by • businesses G: increased tax returns • X: increased consumption expenditure abroad •
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Growth in select economies
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Worldwide
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros A second way to view growth is supply side growth: this is a shift in the AS.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros From a supply-side perspective the state efforts should be geared towards improving the supply side of the economy. This is achieved through: Improved production management • Controlling wage increases • Reduction of corporate & personal taxes • Reduction in u-ment benefits • Deregulation • New venture creation • • Privatization of state-owned firms
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros But do the short-term views on growth give credence to economic “growth”? NO: changes in AD and AS are short term, hence the fluctuations in GDP or GNI – business cycles - which tell us nothing about the evolution of the economy in having made its citizens wealthier, better- off and happier, in both absolute and equal terms, which is better captured by a shift in LRAS and ALRAS
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Output put gap Output gap refers to the difference between the potential and actual output. It is • Positive when the actual exceeds the potential • Negative when the actual is lower than the potential However: This is not to be confused with the gap between LRAS and ALRAS • A positive output gap occurs only in the short run (i.e. supply lags • behind demand) whereas the gap between LRAS and ALRAS is long- term (i.e. the output gap is always negative because an economy cannot or doesn’t want to be optimally efficient)
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros e.g. UK output gap
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Worldwide
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Grow owth polici cies es
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Grow owth fa fact ctors What are the factors that contribute to growth? The following: • capital formation • human resources • natural resources • technology These are key factors for the growth (development?) of developing economies for Samuelson and Nordhaus ; however, one can argue that they also apply to developed economies
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros Accou Ac ounting grow owth fa fact ctor ors These factors can be expressed numerically in the aggregate production function which seeks to show the relative contributions of the factors of production to output growth: Q = A x f(K . L. R) ) where A tech, K capital, L labour, R natural resources In the same vein, the Growth Accounting formula shows the relative contributions of labor and capital to output growth: % Y = ¾ % L + ¼ % K + Tec If Tec = 0 output grows with diminishing returns
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros e.g. CH these relative contributions fit Switzerland’s industrial make-up since the tertiary sector accounts for 70% of the economic activity and is labor intensive, whereas the remainder mainly concerns the secondary sector which is mainly capital intensive
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