Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-1 Chapter 16 The Economics of Growth

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-2 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.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-3 Learning Objectives (cont.) Analyse how labour productivity and, therefore, living standards can be raised. Develop a formal full-employment growth model. Describe and explain the growth record of Australia. Briefly survey growth policies.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-4 Learning Objectives (cont.) Review the debate over the desirability of growth as an economic goal. Examine whether continued economic growth is feasible.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-5 Growth Economics Concerned with analysing the patterns of long-term trends in an economy’s productive capacity and factors that influence these trends

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-6 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-7 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-8 Causes 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 Demand and efficiency factors

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 16-9 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Supply Factors (cont.) Labour force productivity Labour productivity is the real output per worker per hour Real output = worker hours × labour productivity

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Economic Growth and the Production Possibilities Curve Consumer goods Capital goods B A D C

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Models of Growth: The Classical Model Emphasises the supply side of economic growth – determinants of the productive capacity of the economy – interaction of:  law of diminishing returns  population growth

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Population Growth Optimum population – Population which, given the economy’s natural resources and technology, will yield the greatest income per person

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Population Growth (cont.) 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 (less developed countries) – If population growth coincides with increases in labour productivity then rising standards of living will occur (industrially advanced countries)

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Full-Employment Growth Model Capital–Output Ratio 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 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Australia’s Growth Record In the past 50 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Sources of Australian Growth Labour inputs – Immigration Productivity increases – Technological progress – Capital – Education and training Allocative efficiency and growth Other factors – Political stability – Social philosophy

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Population and Labour Force Growth 1870–71 to 2001–02

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Sources of Population Growth 1949–50 to 2001–02

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Growth Policies Purposeful action on the government’s part to enhance the prospects of growth Policy depends on the school of thought – Keynesian policies – Supply-side policies – New-classical economics and minimum government intervention

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Case For Growth Improved living standards Environmental benefits – Control pollution not growth Income inequality Non-material considerations

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Doomsday Models Club of Rome 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Doomsday Models (cont.) Criticisms: The price system Behavioural patterns Role of technology Applying existing knowledge New resources and products Increasing returns to technology

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Next Chapter: Growth and the Less Developed Countries