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PART 10 ECONOMIC GROWTH AND DEVELOPMENT Chapter 26 Economic growth East Asian growth Miracle or myth? Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-1 Lecture Plan • Meaning of economic growth • Economic growth and the PPC model • Indicators of economic growth • Limitations of GDP • Sources of economic growth – – Supply factors Demand factors • Theories of economic growth • International comparisons (the PPP method) • Costs and benefits of economic growth Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-2 The Meaning of Economic Growth • Economic growth: a sustained increase, over time, in the real value of the production of goods and services (GDP growth) • It means increasing the quantity or volume of goods and services available in the economy in order to satisfy as many wants as possible • Production Possibilities Curve (PPC) shows the different maximum possible combinations of quantities of two types of goods Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-3 The PPF model and economic growth • When the quantity A and/or quality of resources increases the economy can produce more of both products and the entire curve will shift outwards • This is a representation of economic growth B Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-4 Indicators of Economic Growth • Real GDP (GDP at constant prices) • The increase in real GDP/GNP per head • Gross National Product (GNP) • Net Domestic Product (NDP) = GDP – depreciation of capital equipment Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-5 Limitations of GDP • As a measure of economic growth, GDP ignores – – – non-monetary incomes Unpaid production The cash economy and black markets • As a standard of living indicator,GDP/head ignores – – – Income distribution The amount of effort required to produce GDP The costs of growth (e.g. pollution, stress) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-6 Sources of Economic Growth • Supply factors – – – Natural resources (land) Human resources (labour and enterprise) Capital goods • Demand factors – Allocative factors Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-7 Theories of Economic Growth • The classical view of economic growth (Ricardo and Malthus) – – Law of diminishing returns Population explosion and subsistence living • The neo-classical growth theories – – – ‘Endogenous’ growth theories Government role Social competence Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-8 Comparative Economic Growth, OECD and Australia (% p.a.), 1990 to 2003 6.0 5.0 % p.a. 4.0 3.0 Australia 2.0 OECD 2002 2000 1998 1996 1994 –1.0 1992 0.0 1990 1.0 Source: Adapted from OECD, Economic Outlook, June 2004. Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-9 International Comparisons • World Bank Atlas method: 3-year average of international exchange rate • The purchasing power parity (PPP) method: calculates the size of an individual economy on the basis of what a country actually produces and consumes • The PPP conversion factor = the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as US$1 in the United States Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-10 East Asia’s Economic Growth: Myth or Miracle? • P. Krugman (1994): East Asia’s growth—same as in the old Soviet Union—is based only on mobilisation of more resources, not on efficiency • Studies by the World Bank and other economists indicate an increase in ‘Total Factor Productivity’ (e.g. quality growth) in East Asia, close to developed economies Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-11 Benefits of Growth • More goods and services • Material living standards (consumption) can be raised • More employment opportunities • Reduces government outlays for unemployment benefits and other related social measures Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-12 Costs of Economic Growth • Pollution, environmental damage • Urban and suburban congestion • Excessive use of scarce non-renewable resources • Shortages of skilled labour • Limits to growth? Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 26-13