Download Chapter 16

Chapter 17
The Economics of Growth
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–1
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–2
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–3
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–4
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–5
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–6
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–7
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–8
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–9
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–10
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–11
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–12
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–13
Capital goods
Economic Growth and the Production
Possibilities Curve
C
A
B
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
D
Consumer
goods
17–14
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–15
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–16
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–17
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–18
Aggregate Expenditures and Growth
• Expanding levels of demand needed to achieve
full-employment GDP
• Investment can be:
–
–
income creating
capacity creating

Capital–output ratio
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–19
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
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–20
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
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–21
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–22
Population and Labour Force Growth in Australia,
1870–71 to 2001–02
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–23
Sources of Population Growth, 1949–50 to
2001–02
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–24
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
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–25
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  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–26
In Defence of 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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–27
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
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–28
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 Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–29
Next Chapter:
The International Monetary System
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa
Slides prepared by Muni Perumal, University of Canberra
and Jay Bandaralage, Griffith University
17–30