Extension Chapter 5 The economics of growth Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Learning Objectives Understand how growth is defined and why it is important. Discuss the sources or ingredients of growth. Describe the classical growth model and its dismal implications. Analyse how labour productivity and, therefore, living standards can be raised. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Learning Objectives (cont.) Develop a formal full-employment growth model. Describe and explain the growth record of Australia. Briefly survey growth policies. Review the debate over the desirability of growth as an economic goal. Examine whether continued economic growth is feasible. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Growth Economics The area of economics concerned with analysing the patterns of long-term trends in an economy’s productive capacity and factors that influence these trends. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Economic Growth Economic growth is defined and measured in two ways: Increase in real GDP over time (% p.a.) e.g. comparing regional economic power or influence Increase in real GDP per capita over time (% p.a.) e.g. comparing standards of living. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Importance of Growth Greater ability to face economic challenges Small changes in growth can dramatically affect a country’s economy. Increased opportunities incomes, education, social welfare, environmental Lessens the burden of scarcity Allows economy to realise economic goals more fully. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Causes of Growth Six strategic ingredients of growth Supply factors: physical ability of economy to grow quantity and quality of natural resources quantity and quality of human resources supply or stock of capital goods technology Aggregate demand factors The demand factor The efficiency factor. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Supply Factors Growth is attributed to the availability of more and better resources, including the stock of technological knowledge. Two ways to increase output: increase in inputs of resources increase in the quality or productivity of those inputs. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Supply Factors (cont.) Labour force productivity Labour productivity is the real output per worker per hour. Total output = worker hours  labour productivity Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Demand Factors A growing level of demand is required in order for the full-employment of an expanding supply of resources. Demand and supply factors are interrelated. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Allocative Factor In order to achieve productive potential, a nation must: have full-employment of resources AND achieve full production from resources Resources must be allocated to get the maximum amount of goods and services possible. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Production Possibilities Recall the production possibilities curve: points on the curve represent maximum amounts of production points inside the curve represent a failure to achieve full employment and full production. Improvement in supply factors will shift the curve outwards. Economy will not necessarily operate on the curve unless demand is sufficient and allocative efficiency is realised. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Economic Growth and the Production Possibilities Curve Capital goods A Consumer goods B Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Models of Growth: The Classical Model The classical model emphasises the supply side of economic growth determinants of the productive capacity of the economy interaction of two important factors: law of diminishing returns population growth. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Law of Diminishing Returns As successive increments of one resource are added to a fixed resource, beyond some point, the resulting increases in total output will diminish in size. Disproportionate increases in resources e.g. large increases in labour, smaller increases in arable land. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Population Growth Optimum population Population which, given the economy’s natural resources and technology, will yield the greatest income per person. Population growth may be a mixed blessing. Malthus’s thesis: Given diminishing returns, persistent and substantial population growth will force and maintain the standard of living close to the subsistence level (in less developed countries). If population growth coincides with increases in labour productivity then rising standards of living will occur (in industrially advanced countries). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Aggregate Expenditures and Growth Expanding levels of demand needed to achieve full-employment GDP Investment can be: income creating capacity creating Capital–output ratio. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Equilibrium GDP with a rise in NX (C + I + G )2 Full employment (Year 2) (C + I + G )1 Full employment (Year 1) 510 490 470 450 C+G+I (billions of dollars) 45 o 450 470 490 510 530 Gross Domestic Product ($ billions) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Full-Employment Growth Model Capital–Output Ratio is the relationship between net increases in the size and value of the capital stock (net investment) and sustainable increases in real GDP (capacity output) For example, ratio of 4:1 means for every $4 of net investment in year 1 the economy is capable of producing $1 of additional output in year 2 and succeeding years. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Australia’s Growth Record In the past 55 years: real GDP increased by 6.3 times real GDP per capita increased by 2.8 times over the period. Substantial improvements in product quality and leisure time have been made. Growth has been less than in many other developed nations. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Sources of Australian Growth Labour inputs immigration Productivity increases technological progress stock of Capital education and training Allocative efficiency and growth Other factors political stability social philosophy. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Population and Labour Force Growth in Australia, 1870–2004 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Sources of Population Growth, 1949–50 to 2003–04 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Growth Policies Growth policy represents purposeful action on the government’s part to enhance the prospects of growth. Policy depends on the school of thought, such as: Keynesian policies supply-side policies new-classical economics and minimum government intervention. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

The Case Against Growth pollution and environmental deterioration problem resolution Does growth mean that poverty is eliminated? human obsolescence and insecurity increased insecurity as machines replace humans growth and human values. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

In Defence of Growth improved living standards environmental benefits control pollution not growth income inequality non-material considerations. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Are There Limits to Growth? Club of Rome and the Doomsday models state that: The growth paths of population, output and pollution are on a catastrophic collision course with production limits imposed by natural resources and the pollution-absorbing capacity of the environment, Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Doomsday Models Criticisms of the Doomsday models are: the price system behavioural patterns Role of technology applying existing knowledge new resources and products increasing returns to technology. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal

Next Chapter: The development of macroeconomic debates Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada By Muni Perumal