1. 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

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.
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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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
Gross Domestic Product ($ billions)
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles 2e, by Jackson, McIver & Bajada
By Muni Perumal

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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