H2 Economics: Economic Growth

macroeconomics

economic growth notes

introduction
negative/slow growth
inflationary growth

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
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H2 Economics: Economic Growth

introduction
Definition
- Economic growth is defined as the expansion/increase in an economys level of
output/GDP over time
- Actual Growth (AG): annual percentage increase in national output (the rate of
growth in output that the economy produces)
- Potential Growth (PG): annual percentage increase in the economys capacity
(i.e. the speed at which the economy could grow)
*Economic growth refers to both AG and PG
Measurement
- usually rate of growth of real GDP over time
Illustration
- using AD-AS
- increase in AD (AD shift right) raises real output from Y0 to Y1 - represents actual
growth
- for actual growth to be sustained in the long run, increase in AD alone is not
enough
- requires increase in potential output (AS shifts right - potential growth)
- when AD shifts rightwards in tandem with AS, non-inflationary economic growth
(NIEG) is achieved
Benefits of Economic Growth
1) Increased levels of consumption
- EG is key to improving material SOL, which is dependent on the level of
consumption per person
- real GDP per capita used as proxy
- actual growth - more produced - more available for consumption
2) Creates jobs, reduces unemployment, increases RNI
- jobs created when there is actual growth (AD shift right) - firms face
unplanned decrease in stocks - increased dd for FOP - more workers hired
- potential growth (largely brought about by increases in productivity) may
help to reduce structural unemployment

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
Loon

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H2 Economics: Economic Growth

Costs of Economic Growth

1) Demand-pull inflation
- potential growth does not increase in tandem with actual growth
- inflationary pressure
- capacity of economy cannot match rising demands of the nation
- supple bottlenecks
- increase in AD - unplanned decrease in stocks - firms want to raise production,
but FOP limited - bid higher prices for FOP - drive prices up
- overheating economies e.g. China, India
2) Structural unemployment
- rapid growth often associated with structural changes associated with a
dynamic economy
- rapid innovation and technological changes as economy moves up value chain
- e.g. Singapore economy - from dependence on exporting low-end
manufactured goods to high-end knowledge-based, capital-intensive goods
- low-skilled workers may find that their skills have been made redundant mismatch of skills
- do not have skills demanded by employers in the new economy/new sectors
3) Worsen income redistribution
- rapid economic growth may result in widening income disparities
- widening income gap
- e.g. Singapore Gini coefficient from 0.436 in 1990 to 0.473 in 2011
- rich are usually the more mobile, talented entrepreneurs - EG presents more
opportunities for this group of people
- poor tend to be unskilled, low education - can only fit into low-paying jobs, tend
to lag behind ito earning power
(However, progressive tax system may be able to alleviate this)
4) Environmental pollution
- EG often accompanied by industrialization - deterioration of environment
- e.g. air, water pollution, industrial noise, stench, congestion, traffic jams
- e.g. China
(However, environmental consciousness tends to increase with increase in
affluence - regulation of pollution also tends to be tougher in devt countries)
5) Reduced current consumption
- important source of EG is investment in both human and physical capital
- investment requires savings, which implies cutting down on current consumption
6) Depletion of natural resources

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
Loon

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H2 Economics: Economic Growth

negative/slow economic growth

- caused by negative/slow growth in any of the components of AD (C, I, G, X-M)
- causes AD to fall/increase slowly
- leads to slow/negative increase in real national output
Exemplification: Negative growth in Singapore
- Singapore experienced a contraction of GDP in 2009 with -.08% GDP growth
- global financial crisis
- trading partners suffered from recession - fall in global income - fall in demand for
our exports
- investment also fell, as firms er/r fell
- with the fall in I and fall in X (esp since Singapore is export-dependent), AD falls,
causing a contraction of actual growth
Cures (aim to increase AD):
1) Expansionary Fiscal Policy
2) Expansionary Monetary Policy
3) Protectionism

inflationary economic growth

- actual growth faster than potential growth
- sentiments in economy very positive (e.g. C and I are growing at a very fast pace
but potential capacity of the economy is not expanding in tandem)
- once spare capacity is used up, further increases in AD will only bring about
inflation without increase in real output (firms bid higher prices for FOP)
Exemplification: Inflationary growth in China
- China achieved growth of 13% in 2007
- due to increase in exports and investment
- China has natural factor endowment of land and labour - foreign firms outsource
production to China in order to leverage on comparative advantage - huge
influx of FDI
- inflation reached 9% - overheating
Cures:
a) demand-management policies (aim to bring down AD):
a) contractionary FP
b) contractionary MP
b) supply-side policies (aimed at increasing LRAS)
- increase in quantity and/or quality of resources to meet increasing demand

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
Loon

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H2 Economics: Economic Growth

supply-side policies
Increase in Quantity of Resources
1) Capital Accumulation
- increasing PG can be done by increasing the quantity and quality of its capital
equipment
- investment in new capital increases the amount of capital each worker can work
with, hence contributing to increases in productivity
- implies that level of output would have the potential to increase, leading to
economic growth
- funds needed for capital formation can be obtained from savings and FDI
- in Singapore, FDI encouraged by granting foreign firms tax holidays for initial
period of about 10 - 15 years after they set up operations
- shift in dependence on direct tax to indirect tax (GST)
- 1994 - introduced GST at 3%, increased to current 7%
- lowered corporate tax rates from 40% to 17% - encourage investment and work
efforts
- Limitations:
- corporate tax is only one factor which affects investment decisions
- business climate, ease of conducting business
- shift in tax regime - greater income inequality
2) Increase in Quantity of Labour
- larger potential workforce increases productive capacity
- relax immigration laws to increase population size - larger pop - larger workforce
- relax foreign worker policy to increase size of workforce - increases pool of
workers immediately
- raise retirement age
- encourage greater female participation in workforce - give tax rebates for
working mothers, ensure quality childcare facilities are available and affordable,
allow more flexible working arrangements
- Limitations:
- relaxing immigration and foreign workers policy often creates social
tension - seen as threat to local citizens
- increase in pop may lead to problems such as congestion or rising
property prices

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
Loon

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H2 Economics: Economic Growth

Improve Quality of Resources

1) Invest in Human Capital
- human capital refers to the accumulated skill and knowledge of workers
- regarded as the most fundamental source of EG
- through education, training and work experiences
- if knowledge is lacking, resources may not be used efficiently
- investment in human capital raises the level of knowledge and skills present in the
workforce - increase productivity
- e.g. Skills Programme for Upgrading and Resilience (SPUR) - scale up training
efforts to build up stronger capabilities
- government also spends on improving quality education in Singapore to ensure a
workforce that is equipped with knowledge and skills and constantly able to
upgrade and re-skill to adapt to future demands
- Limitations:
- A3: Age, Aptitude, Attitude
2) Technological Advancements
- technological improvements lead to increased productivity
- by finding new ways of getting more out of our resources
- possible to obtain more output from the same amount of inputs than before
- to reap benefits of tech advancements, both human and physical capital must
increase (i.e. have the tools as well as knowledge to operate them)
- importing technology: adopt technology developed by others (usually used by
less developed/developing countries)
- R&D: Singapore aims to increase R&D spending to 3.5% of GDP by 2015
- Productivity and Innovation Credit scheme to encourage R&D efforts in private
sector by giving generous tax deductions on R&D expenditures
- Limitations:
- long gestation period, expensive, not guaranteed results
3) Dynamic Entrepreneurship
- entrepreneur contributes to production through innovations, looking for new
markets and new methods of production
- SPRING Singapore gives out grants and seed funds for aspiring entrepreneurs
The End

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2015
The A-Level Guide. All rights reserved.
2012 ThamKah
Loon

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