presentation19 growth - zamaros.net Econs Presentation 19 - growth.pdf · presentation19 growth Economics, 6th ed., 2016, Prof. Dr. P. Zamaros . Development refers to the increase

presentation19

growth

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Development refers to the increase in living conditions and any

improvement thereof based on three core values that include

• sustenance, as the capacity of economy to meet the necessities of

its people

• self-esteem” as the quality of life

• freedom from servitude, that is freedom from poverty

Metrics: HDI

Development


http://hotbabefatchicks.hubpages.com/hub/Three-Core-Values-of-Development-Economics





http://hdr.undp.org/en/content/human-development-index-hdi

Indicators


Comparative


Unlike development, growth refers to the degree by which an economy’s

national output increases over time as a result of an increase in the

quality and quantity of resources.

Metrics: GDP, GNI

Economic growth is therefore the long-term expansion of the productive

potential of the economy = the expansion of PPF (since this limit shows

the max productive capacity of an economy considering the efficient use

of its resources)

Growth


Growth as the outward expansion of the production possibility frontier is a

long-term and potential process: it is about the shift of the LRAS curve (in

real terms).

The shape and the assumptions underlying the LRAS depend on the

perspective taken, whether Keynesian or Monetarist/Neo-Classical or

Relational


Under the Monetarist/Neo-Classical perspective, the long-run the

productive capacity of the economy is independent of prices while

dependent on the quality and quantity of resources, hence is perfectly

inelastic. Therefore, economic growth can be seen as the rightward shift

from LRAS1 to LRAS2:


In the Keynesian tradition there is economic growth when there is an

increase in the factors of production and output, hence a shift from

LRAS1 and LRAS2:


Since both perspectives consider economic growth in the same manner,

they consider that there is economic growth when an economy manages

to increase its industrial base and thus its factors of production, and at

the same time its output or output per capita.

In a simple manner, there is economic growth when the citizens of a

nation become wealthier.

However there is a condition attached to this: that the distribution of

income is carried out equally, which is far from the being factually the

case.


In the Relational Approach, there is more to be critical about the

theories on growth and development: an economy does not operate at

the level of the PPF.

The usual explanation that traditional approaches give is inefficiency;

both approaches will then suggest ways for rendering the economy

optimally efficient which at are bottom-line unfeasible.

Thus since the state of the economy is factually less than optimally

efficient, the rightward expansion of the PPF from LRAS1 to LRAS2

implies a rightward shift from ALRAS1 to ALRAS2.


How this shift will occur will depend on the state of the economy and its

management abilities


Thus the Relational Approach offers a number of possibilities

a/ A rightward shift in ALRAS without a change in LRAS

Productive efficiency may boost SRAS thus improve ALRAS but not

changing LRAS

b /A rightward shift in LRAS to improve ALRAS

e.g. GR: housing the 2004 Olympic Games, which affected the Greek

GDP, did not necessarily render the economy more competent to use its

resources optimally: the dilapidation of the Olympic structures

themselves is testament that the economy did not improve the

management of its resources.


c/ A change in the differential between LRAS and ALRAS

Following the expansion of the PPF, the difference between potential

and actual output might be larger – as shown in the diagram where G2

> G1 where the gap is getting bigger indicating increased inefficiency.

This depends on

1/ the growth strategies of the firms within the major industries of an

economy;

2/ their willingness to operate more efficiently, which might not be

strategically the best option for them


But the gap can also be the result of how the LRAS is estimated


Growth in the short term often evoked by politicians and journalists can

be looked at in two ways.

As demand side growth, that is, a shift in the AD expressed as the

annual % change in GDP, which is the growth rate. Growth rates include:

• Negative growth (<0%)

• Low (0-2%)

• Moderate (3-5%)

• Important (6-10%)

Short term growth


Growth as the rightward shift of the AD is the result of an increase in

• C: fall in the rate of interest, or increase in wages

• I: increased savings, stock purchases and entry in new markets by

businesses

• G: increased tax returns

• X: increased consumption expenditure abroad


Growth in select economies


Worldwide


A second way to view growth is supply side growth: this is a shift in the

AS.


From a supply-side perspective the state efforts should be geared

towards improving the supply side of the economy. This is achieved

through:

• Improved production management

• Controlling wage increases

• Reduction of corporate & personal taxes

• Reduction in u-ment benefits

• Deregulation

• New venture creation

• Privatization of state-owned firms


But do the short-term views on

growth give credence to

economic “growth”?

NO: changes in AD and AS are short term, hence the fluctuations in

GDP or GNI – business cycles - which tell us nothing about the

evolution of the economy in having made its citizens wealthier, better-

off and happier, in both absolute and equal terms, which is better

captured by a shift in LRAS and ALRAS


Output gap refers to the difference between the potential and actual

output. It is

• Positive when the actual exceeds the potential

• Negative when the actual is lower than the potential

However:

• This is not to be confused with the gap between LRAS and ALRAS

• A positive output gap occurs only in the short run (i.e. supply lags

behind demand) whereas the gap between LRAS and ALRAS is long-

term (i.e. the output gap is always negative because an economy

cannot or doesn’t want to be optimally efficient)


Output gap

e.g. UK output gap


Worldwide



Growth policies

What are the factors that contribute to growth?

The following:

• capital formation

• human resources

• natural resources

• technology

These are key factors for the growth (development?) of developing

economies for Samuelson and Nordhaus ; however, one can argue that

they also apply to developed economies

Growth factors


http://www.mhhe.com/economics/samuelson17/students/summ28.mhtml





These factors can be expressed numerically in the aggregate production

function which seeks to show the relative contributions of the factors of

production to output growth:

Q = A x f(K . L. R)) where A tech, K capital, L labour, R natural resources

In the same vein, the Growth Accounting formula shows the relative

contributions of labor and capital to output growth:

%Y = ¾ %L + ¼ %K + Tec

If Tec = 0 output grows with diminishing returns


Accounting growth factors

e.g. CH these relative contributions fit Switzerland’s industrial make-up

since the tertiary sector accounts for 70% of the economic activity and

is labor intensive, whereas the remainder mainly concerns the

secondary sector which is mainly capital intensive


Documents

presentation19 growth - zamaros.net Econs Presentation 19 - growth.pdf · presentation19 growth Economics, 6th ed., 2016, Prof. Dr. P. Zamaros . Development refers to the increase