1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-1 Chapter 15 The economics of growth

2. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-2 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

3. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-3 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

4. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-4 Learning objectives (cont.) Review the debate over the desirability of growth as an economic goal Examine whether continued economic growth is feasible

5. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-5 Growth economics Concerned with analysing the patterns of long-term trends in an economy’s productive capacity and the factors that influence these trends

6. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-6 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

7. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-7 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 Places a nation in a better position to resolve domestic and international socioeconomic problems

8. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-8 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 Aggregate demand and resource allocation factors –Demand factor –Efficiency factor

9. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-9 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

10. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-10 Supply factors (cont.) Labour force productivity –Labour productivity is the real output per worker per hour Real output = worker hours × labour productivity

11. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-11 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

12. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-12 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

13. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-13 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

14. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-14 Economic growth and the production possibilities curve Consumer goods Capital goods B A D C

15. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-15 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

16. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-16 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

17. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-17 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 (less developed countries) –If population growth coincides with increases in labour productivity then rising standards of living will occur (industrially advanced countries)

18. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-18 Aggregate expenditures and growth Expanding levels of demand needed to achieve full-employment GDP Investment can be: –Income creating –Capacity creating  Capital–output ratio

19. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-19 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

20. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-20 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

21. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-21 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

22. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-22 Population and labour force growth 1870–71 to 2001–02

23. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-23 Sources of population growth 1949–50 to 2001–02

24. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-24 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

25. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-25 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

26. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-26 Case for growth Improved living standards Environmental benefits –Control pollution not growth Income inequality –Growth with redistribution can achieve greater equality in the distribution of income Non-material considerations –Growth is more consistent with ‘the good life’ than is stagnation

27. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-27 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

28. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 15-28 Doomsday models (cont.) Criticisms: The price system Behavioural patterns Role of technology Applying existing knowledge New resources and products Increasing returns to technology