Download Causes of Economic Growth

Causes of Economic
Growth
The PPF model
If the economy were operating on it
If the economy is working below its frontier
frontier
Point C.
Pont A and Point B
How would we illustrate economic
growth has occurred?
How would we illustrate that growth
Any
factor that will shift
Anyoccurred?
movement by that economy in
has
the
PPF
outwards
is
a
a northeast direction.
potential cause of
We would need to shift the
economic growth
frontier to the right.
Factors that shift the PPF

New natural resources are discovered, e.g.
oil is discovered on the West Coast.

Increase in the quantity or quality of
labour, e.g. quality- an apple picker begins
to pick 5kg more apples in an hour than
previously; quantity- more people are
employed to pick apples.

Investment (capital goods or man-made
resources), e.g. more tractors are
purchased by the local contractor.
Food
Discovery and Use of New
Resources
Show this effect on
the PPF.
PPF2
This effect shows an
increase in the
productive capacity of
the economy.
PPF1
Manufactured Goods

This assumes that the new resources that have
been discovered are used in the production of
both products.

Draw on this PPF what it would look like if
the new resources discovered were only
useful in the production of manufactured
goods
Food
PPF2
PPF1
Manufactured Goods
Questions:

Good A
1. Show the effect of:
– A. a discovery of new corn crops
Good B
 (good a- Cornflakes, good b- Cornbread)
– B. a depletion of a recently discovered tree
plantation.
 (good a- furniture, good b- ipod’s)
Quality and Quantity of Labour
(human)

More workers (quantity)
– Increase in natural birth rate (over time)
– Increased Immigration will have an
immediate effect
– An increase in labour force participation
(decreased unemployment) from the working
age population. This could be due to decrease
in welfare payments, making working more
attractive.
Quantity and Quality of Labour

Improving worker quality may be caused by a
number of factors
– Better training and skills
Good A
 Makes existing workers more productive ( produce
more for the same time or cost)
The effect of
improvements in
the skills of workers
producing good B.
Good B
Quality and Quantity of Labour
(human)

Improving worker quality may be caused by a number
of factors
– Better training and skills
 Makes existing workers more productive
– Reorganisation of production and the workplace
 Work practices become more efficient – worker productivity
increases.
– Improved attitudes at work
 More people are willing to work
 Increases the labour force participation rate ( proportion of the
population that is either employed or looking for work)
 Also mean workers are happier at their work so productivity
increases as a result.
Good A
Questions

Show the effect of:
Good B
– Previously happy workers who now resent
their manager because he/she took away the
privilege of having tea and coffee at break
time (this manager is in charge of producing
lego)
 (good a- lego, good b- barbies)
– Immigrants coming into NZ who have skills in
making clothes
 (good a- dresses, good b- track pants)
Investment (physical)

Investment = more capital goods (man-made
resources used to produce goods and services)

More investment means productive capacity of
the economy has increased

e.g. investment is additional machinery or plant
(these aren’t necessarily being used yet but the
ability to produce more has increased).
Investment

Influenced by two key factors
– Interest rates
– Business confidence and expectations
Interest rates are the cost of borrowing
Higher interest rates will reduce the amount of investment
that will occur in the economy.
But if interest rates fall producers are likley to undertake
more investment
Key terms to memorise

Investment – Firms using bank loans to purchase capital
goods

Physical investment – Purchase of capital goods (Capital
formation)

Human investment – Training, skill improvement
qualifications of workers

Productivity – Output relative to input. Rate of production

Resources – Endowments/inputs used in production
Technology

An improvement in method or resource use
(a.k.a innovation)
– E.g. a machine to print out receipts for paying
customers instead of hand writing.

Technology enables productivity levels to
increase as well as more efficient use of
resources.
– Tasks can be completed faster, using
resources more efficiently (less wastage: time,
cost, resources etc)
Key terms

Technology- New innovative methods that
improve ways of doing things.

Productive capacity – Maximum possible
potential output
Opportunity cost of consumption

Present consumption means firms sell
more (increasing confidence/profits
increase in output = GDP)

Present saving means decreased
consumption, leads to firms selling less.
Firms then reduce output which leads to
GDP decreasing.
Capital vs. Consumer goods
NOTES to stick in.
 More consumer goods produced NOW means
less capital goods.


This is great for the present but this restricts
FUTURE growth.

More capital goods produced NOW means we
can produce more consumer goods in the future.
This will shift the PPC out further than if we
increase consumption in consumer goods.

Imagine that the economy has resources that
it’s technology are unable to use.

Example: Iron sands (used to produce steel)
are unable to be used because of impurities
given fixed technology. Say they come across
new technology that enables them to use the
iron sands as it is already to produce steel.

Since the economy can now produce more
machinery, they are also able to produce
more food…how can this be?

B
C
A
A represents the
same resource
allocation prior to
discovery of new
technology
(therefore taking full
advantage of new
technology to
maximise extra
production of
machinery.

B represents leaving the resources as they were prior to discovery of
new technology in order to maintain the same machinery production
(therefore maximising resources that can shift into production of food)

C represents a combination of these two decisions. New technology
discovery allows increased production of both food and machinery.