Economic growth What is economic growth? How can we get the economy to grow? Is economic growth desirable?

Economic Growth and the AD-AS Model

Aggregate Supply National Income / National Output Price Level AS Classical Range Intermediate Range Keynesian Range

Aggregate Supply National Income / National Output Price Level AS Keynesian Range Y0Y0 AD 0 AD 1 Y1Y1 P0P0 Intermediate Range AD 2 Y2Y2 P2P2 Classical Range AD 3 AD 4 P3P3 P4P4 AS 1 Yf1Yf1 YfYf

Economic Growth Measurement of economic growth % increase in real GDP (or GNP) in a year How? Short run keep increasing AD as long as there are idle resources (Keynesian range) Long run expansion in demand, if uncontrolled, may result in sharp price increase (Classical range) only way is to ensure AS shifts as well

Economic Growth Definition expansion in the economy’s productive capacity over time sustained increase in the country’s real national income (GDP / GNP)

Economic Growth Is economic growth a good thing? The fastest growing economy in the world… CountryGrowth rate in 2004 (%) China9.5 Singapore8.4 India7.3 Vietnam7.7 Ireland4.5

Economic Growth The trail-blazing Chinese economy The good it has done :) Higher standard of living

Economic Growth The trail-blazing Chinese economy The damage it has caused :( Environmental problems (Externalities)

Economic Growth Dislocation Destruction of natural beauty

Economic Growth Income disparity

Economic Growth Loss of traditional way of life

Lecture take-away Economic Growth Short Run Growth Graph Long Run Growth Graph Definition

Inflation What is inflation? What is the Consumer Price Index (CPI)? Why is inflation undesirable?

Inflation Definition A sustained and inordinate increase in the general price level Sharp increase ____ % ↑ in price levels [mild inflation]  not considered a problem One-off increase in prices (e.g. from the adjustment in GST rate)  does not count as inflation

Inflation Definition A sustained and inordinate increase in the general price level A basket (mix) of goods and services Consumer Price Index (CPI)* basket of goods and services that a typical family consumes in a year include transportation, housing, food, insurance, electrical appliances and furnishing, etc.

Consumer Price Index Interviewer Interviewee (consumer) What goods and services do you buy in a year?

Consumer Price Index Price $1,500 $4,000 $2,000 Price $1,800 $4,500 $2, Price Index 100 set as base year Price Index

Consumer Price Index Interviewer Interviewee (consumer) How much of your income do you spend on the goods? 40% 30%

Consumer Price Index Price Index 100 Price Index Weight 40% 30% × × × CPI = ( ) ÷ ( ) = 100 CPI = ? = Inflation rate = 14.75%

Causes of Inflation National Income / National Output Price Level AD P0P0 Y0Y0 = ? = C + I + G + (X-M) AS AD 1 P1P1 Demand- pull inflation

Causes of Inflation National Income / National Output Price Level AD P0P0 Y0Y0 = ? = C + I + G + (X-M) AS AS 1 P1P1 Cost-push inflation

Causes of Inflation Demand-pull inflation AD keeps rising –govt policy –consumers / investors confidence –external demand BUT economy is unable to produce enough g&s to keep up with the rising AD due to –full employment –structural rigidity / supply bottlenecks Shortages develop Prices increase

Causes of Inflation Article: China overheating "The overheating problems in some sectors have imposed pressure on coal, power, oil and transport supplies and resultingly brought about rises in prices for raw materials and other necessities, according to the meeting.“ (New York Times)

Causes of Inflation Cost-push inflation Rising cost of production –essential fop e.g. oil –weakening exchange rate –Imported inflation Firms pass on the higher cost to consumers by raising prices of final g&s

Causes of Inflation Case Study: Oil price rising In addition to gasoline, crude oil is used to make rubber and plastics, asphalt, synthetic fibres and fuel for electrical power generators…. Some economists argue that oil price increases matter because they make it more costly to produce a variety of products. Consequently, prices increase. (New York Times) Businesses pay more to transport their goods and heat their premises, and they pass the extra costs on to customers, many of whom are also paying more for their petrol. (The Guardian)

Causes of Inflation Case Study: Labour cost “There is increasing inflationary pressure from the tightening labor market and higher product prices,'' said Usara Wilaipich, an economist at Standard Chartered Bank in Bangkok. “The threat of an increase in wages will increase because of the labor situation, especially the property and construction sectors.” (Bloomberg)

Effects of Inflation Internal Effects May have SR benefits Higher profits, may encourage greater production Damaging effects in LR Discourage investment Discourage saving External Effects Damaging external effects Reduce export competitiveness Capital flight

INFLATION Effects Causes Solutions Demand -pull Cost -push ? ? Lecture take-away

INFLATION Effects Causes Solutions Internal External ? ? Lecture take-away