Scribd Logo
Upload

Welcome to Scribd!

  • 4 views

    Lecture 2

    Uploaded by

    enabbey1

    Copyright:

    © All Rights Reserved
    Download as ODP, PDF, TXT or read online from Scribd

    Lecture 2

    Uploaded by

    enabbey1
    4 views24 pages

    Copyright

    © © All Rights Reserved

    Available Formats

    ODP, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as ODP, PDF, TXT or read online from Scribd
    Download as odp, pdf, or txt
    4 views24 pages

    Lecture 2

    Uploaded by

    enabbey1

    Copyright:

    © All Rights Reserved
    Download as ODP, PDF, TXT or read online from Scribd
    Download as odp, pdf, or txt
    You are on page 1of 24

    University of Ghana Business School

    BSC Administration Program


    UGBS 204: Macroeconomics for Business

    Economic Growth
    Sections

    1. Introduction
    2. Potential GDP and the Output or GDP Gap
    3. Growth in Potential GDP
    4. Benefits of Growth
    5. Costs of Growth
    6.

    7.

    8.

    9.

    10.
    Introduction to Economic Growth

    —Why are some countries richer than others?


    —Why are some countries getting richer , while others are poorer?
    —Why are we so better off than our grandparents, and why will our
    children be better off than us?
    —Answers to these questions bother on economic growth one of the most
    important issues in macroeconomics
    ¡

    ¡
    Introduction to Economic Growth
    —Recall in lecture 1 that;
    ¡ An increase in real GNP is called ECONOMIC GROWTH. Here we are
    concerned about long-term trend in real GDP.

    ¡ Under normal circumstances we expect Real GDP to take a steady pattern


    over a long-term period but then more often than not it moves in a series
    of up and downs (short run fluctuations) known as BUSINESS CYCLES.
    ¡

    —While economic growth relates to long-term changes in real GDP,


    business cycles relate to short-run fluctuations in real GDP
    ¡ To get a sense of this distinction I shall recall the slide on the output gap in
    lecture 1
    ¡
    Potential GDP and Output Gap
    —Actual GDP (Y*) refers to what the economy does produce, whilst Potential
    GDP (YP) refers to what the economy could produce if all the resources in
    the economy are fully utilized.
    —The difference between what the economy could have produced and what
    actually is produced is referred to as the Output (GDP) Gap
    YP - Y* = GDP (Output) GAP
    YP – Y* Output Gap >0 A Recessionary Gap
    YP – Y* Output Gap <0 An Inflationary Gap
    YP = Y* Output Gap =0 Full Employment
    —Measurement of Potential GDP is controversial and is often not measured by
    many countries. The IMF does calculate this for countries
    Case 1: YP - Y* > 0

    —In this case the output gap measures the value of goods and services
    that could have been produced if the economy’s resources had been
    fully utilized but actually went unproduced.
    —The total value of unproduced goods and services is lost to the
    economy and in economics you can call that deadweight loss of
    unemployment
    —Because it implies unemployment of some resources, the output gap
    created is called a recessionary gap
    Here
    Y* is actual GDP at equilibrium .
    YP is the potential GDP

    YP -Y*>0 =GDP Gap

    GDP Gap=Recessionary Gap


    A Case of Recessionary Gap
    The Great Depression and the Recessionary Gap
    Case 2: YP - Y* < 0

    —In this case the output gap measures the value of goods and services
    that have been produced above what the economy’s resources
    should have produced at full utilization.
    —How possible? Temporarily actual output can exceed potential output
    because:
    ¡ Labour may work for longer hours than normal
    ¡ Factories may operate for an extra shift or not close for routine repairs and
    maintenance
    —Because this situation generally results in an upward pressure on
    prices it is called an inflationary gap
    ¡
    Here
    Y* is actual GDP at equilibrium .
    YP is the potential GDP

    YP -Y*<0 =GDP Gap

    GDP Gap=Inflationary Gap


    Case 3: YP = Y*

    —In this case there is no output gap measures but actually went
    unproduced.
    —The total value of goods and services actually produced equals the the
    value of goods and services that could have been produced if the
    economy’s resources had been fully utilized
    —The economy is operating at Full Employment and therefore
    unemployment is at the Natural Rate of Unemployment or the Non-
    Accelerating Inflation rate of Unemployment
    —Here no resources are lying idle
    ¡
    Potential GDP and Output Gap- continued

    —Growth theory aims to explain the long term trend in potential GDP,
    while the short-run macroeconomic model will seek to explain the
    output Gap
    —We normally use business cycles to explain the behaviour of the output
    gap
    ¡ Slumps in economic activity produce large recessionary gaps
    ¡ Booms in economic activity produce inflationary gap
    —Thus even if we cant measure potential GDP we can use the business
    cycle to have a sense of whether the economy has a recessionary or
    inflationary Gap
    —
    Growth in Potential GDP
    —When there is growth in real GDP or real GDP per capita, it generates
    long-term increases in standard of living (SOL)
    ¡ Steady increases in per capita GDP in C19th and C20th made citizens of the EU,
    US, Japan etc. materially better off than other citizen, and decade by decade.
    —At times what looks like modest annual growth rates in real GDP have a
    very powerful effect in raising SOL over time because;
    ¡ Growth can go on indefinitely
    ¡ Effect of growth can accumulate
    —If 2 countries start at the same level of income, and country A grows at
    2% p.a. while country B grows at 1% p.a.
    ¡ In 70 years country A’s per capita income will be twice that of country B.
    ¡ Thus within one lifetime these two countries will be far apart in terms of SOL
    Benefit of Growth

    —Growth and SOL


    —
    —Growth and Life-style
    —
    —Growth and Income Redistribution
    —
    Growth and SOL

    —When there is economic growth and you are beneficiary it raises your
    SOL significantly (shared growth is a powerful weapon against
    poverty);
    ¡ If a family in Kenya earns $2500 p.a. At a 4% growth rate, this family within 10
    years will earn $3700 p.a. (of course if the growth is shared in Kenya).
    $2500 (1+0.04)10 = $2500 X 1.48 = $3700
    ¡ This will obviously transform the lifestyle of the ordinary citizen in the economy.
    —What will be the income that will be earned by a family in Ghana in 20
    years if the family currently earns GHȼ6000 p.a. and GDP growth rate
    (shared growth) is 5% p.a.
    GHȼ6,000(1+0.05)20 = GHȼ6,000 X 2.65 = GHȼ15,900
    ¡
    Growth and Life-style

    —Significant increase in the family’s income can lead to a major change in


    the pattern of its consumption
    ¡ The extra income buys very important amenities
    —Markets also expand rapidly
    —Governments construct more economic and social infrastructure to its
    newly affluent citizens
    ¡ An affluent society produces more litter, there could be congestion on the streets
    and pollution
    —Amenities become a matter of social concern because now a
    substantial majority of the population have food, shelter and clothing
    —Technological change creates new improved products to transform SOL
    Growth and Income Redistribution
    —Not everyone benefits from growth equally because growth is normally
    distributed through increased wages and higher profits;
    ¡ The poorest who are unemployed therefore do not share in the growth
    ¡ When growth encourages technological change it leads to loss of jobs, and thus
    not everyone shares in the growth
    —Thus we should note that in even in periods of high growth, the
    distribution is unequal
    ¡ Some will face extreme poverty and hardships and so there will be need for
    redistribution policies to avert the hardships
    —Redistribution policies are pro-poor policies to make growth share
    growth.
    ¡ Here the increment in real GDP is redistributed through gov’t. intervention
    —
    Cost of Growth

    —Opportunity Costs of Growth


    —
    —Social and Personal Costs of Growth
    —
    —Time distribution of benefits and costs of Growth
    —
    Opportunity Costs of Growth

    —In economics nothing is free. Why?


    ¡ Economic resources are scarce

    —To obtain growth there should be heavy investment in capital goods


    and education.
    —Thus some sacrifices have to be made to carry out these investments.
    —The opportunity cost of growth is what the resources used in fostering
    growth could have been put to. This include;
    ¡ Reduction in current household consumption to save more for investment
    ¡ Reduction in government spending on non-capital goods to invest in capital
    goods
    —The opportunity costs of growth is the primary cost of growth
    Social and Personal Costs of Growth
    —A growing and changing economy is an innovative economy
    —Innovation comes with job losses as the economy adjusts
    —The cost of being unemployed to the society and to the individual is
    therefore the social and the personal cost of growth
    —Social costs will include increases in social vices (prostitution, drug
    abuse, armed robbery)
    —Personal costs include loss of household income, psychological
    trauma, social seclusion, sense of hopelessness, loss of marriage,
    mental illness etc.
    —Overall technological change/innovation creates more jobs than
    destroys.
    Time Distribution of Benefits and Costs of Growth

    —The costs of technological change that comes with growth is immediate


    ¡ Job losses and reduction in consumption is immediate

    —Forgone consumption to invest in growth is also immediate


    In contrast
    —Improved SOL from growth is not immediate
    ¡ New products take time to be developed and so the benefits accrue to future
    generations
    —Improved SOL does not accrue to everyone immediately.
    —For some the change hits them hard immediately but over time they
    become ultimate beneficiaries of the process.

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy