Economic Growth

1. Economic Growth – Causes and Impact
EdExcel AS Economics 2.1.1 and 2.5.4

2. Fastest Growing Countries in 2015
19.33%
9.19%
9%
8.56%
8.33%
7.75%
7.59%
7.56%
7.46%
7.31%
7.23%
7.2%
7.13%
7%
6.86%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Papua New Guinea
Congo
Turkmenistan
Ethiopia
Myanmar
Côte d'Ivoire
Chad
Bhutan
India
Lao P.D.R.
Tanzania
Cambodia
Qatar
Rwanda
Kenya
Real GDP growth compared to previous year (per cent), Source: IMF
• Economic growth is a
long-term expansion of
productive potential
• Short term growth is the
annual % change in real
national output
• Long term growth is
shown by an increase in
trend or potential GDP
and this is illustrated by
an outward shift of long
run aggregate supply
Source: IMF

3. 0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2010 2011 2012 2013 2014 2015* 2016* 2017* 2018* 2019* 2020*
GDPgrowthratecomparedtopreviousyear
The chart shows real GDP growth for the UK from 2010-2014. Data for 2015 onwards
shows forecast growth using data from the International Monetary Fund (IMF)
Source: ONS
The UK Economic Cycle in Recent Years

4. Short Run and Long Run Economic Growth
Short term economic growth
Cyclical changes in real GDP
Changes in AD (C+I+G+X-M)
Changes in short run AS
Short term external shocks to
both demand and supply
Short term policy changes e.g.
changes in interest rates
Long run economic growth
Potential output / trend growth
Productivity of labour & capital
Technological progress and
strength of enterprise
Changes in the labour force
Investment rates

5. Key Factors Affecting Short Run Economic Growth
Interest rates set by
the central bank
Fiscal policy -
government spending
and taxation
Commodity prices
such as oil, gas and
foodstuffs
Exchange rates Trading conditions in
other countries
Confidence of
businesses and
households

6. Short Run Economic Growth from Increasing AD
General
Price Level
Real GDP
GPL1
AS
Y1
AD1
AD2
Y2
GPL2
An increase in AD causes an expansion of aggregate supply and a
higher equilibrium level of national output (i.e. higher real GDP)

7. Key Factors Affecting Long Run Economic Growth
Investment Productivity Labour supply
Research Innovation Enterprise

8. Economic Growth using AD-AS Diagrams
General
Price Level
Real GDP
GPL1
AS1
Y1
AD1
Yp1
LAS1
A rise in a country’s
productive
potential is shown
by an outward shift
of long run
aggregate supply
(i.e. LAS1 to LAS2)
This means a higher
level of aggregate
demand can be
met because of an
increase in the
supply capacity
LAS2
AS2
AD2
Yp2Y2

9. Economic Growth using PPF Diagrams
Economic Growth
A rise in a
country’s
productive
capacity causes
the PPF to shift
out from PPF1 to
PPF2 and this
then allows
increased supply
both of consumer
and capital goods.
Capital
goods
Consumer goods
PPF1
PPF2
A
B
C D
Successful supply-side
policies can help to bring
about an outward shift of the
a country’s PPF
E
F

10. Some of the Key Drivers of Economic Growth
Economic
growth
Expanding the capital stock
Increasing the active
labour supply
Extracting and
selling natural
resources
Improving factor
productivity
Driving innovation and
enterprise
Economic growth is a
sustained rise in a country’s
productive potential and real
national output
The main drivers of long run
economic growth are higher
productivity and gains from
innovation and rising real
incomes for households

11. Linking Capital Investment to Economic Growth
Injection of demand for
capital goods industries
Bigger capital stock can lift
productivity / incomes
Economies of scale &
better competitiveness
Investment helps to sustain
export-led growth

12. What are the main Benefits of Economic Growth?
Higher living standards – i.e. Real GNI per capita –
helps to lift people out of extreme poverty and
improve development outcomes (e.g. rising HDI)
Employment effects – sustained growth stimulates
jobs and contributes to lower unemployment rates
which is turn helps to reduce inequality.
Fiscal dividend – higher economic growth will raise
tax revenues and reduce government spending on
unemployment-related welfare benefits
Accelerator effect - rising growth stimulates new
investment e.g. in low-carbon technologies. Better
growth may attract foreign direct investment projects

13. Is there a Virtuous Circle of Economic Growth?
Higher real
national output
(GDP)
Increased capital
spending
Increased output
per head
(productivity)
Increased wages /
real incomes for
people
Rising consumer
spending on
goods and
services

14. Benefits from Growth driven by Technological Change
A rise in
productivity
• Higher GDP per worker
• Lower unit costs
• Higher wages
• Higher profits
New
Goods
and
Services
• Lower real prices
• Consumer welfare
gains (lower prices)
• Improved living
standards
Improved
health
• Healthy life
expectancy
• Labour force expands
• Increased productivity

15. Three Perspectives on Economic Growth
Balanced Growth Sustainable Growth Inclusive Growth
Sector balance e.g.
between industries
Meets the needs of
current generations
without limiting
resources for future
generations
Benefits of growth
widely distributed
• Regional balance
Rising median per capita
incomes
• Urban / rural balance Macroeconomic stability
Progress in reducing
relative poverty
• Internal v external
balance (e.g. BoP)
Financial stability
Improving opportunities
for all groups
• Balance between
consumption and
investment
Environmental
sustainability –
protection of natural
capital
Measures to tackle
discrimination and
barriers for affected
groups

16. • Many African countries feature in a league table of the world’s fastest
growing countries both in recent years and in the forecast
• What factors have contributed to rapid economic growth?
Rapid Economic Growth in Africa

17. • What factors have contributed to rapid economic growth?
1. Improvement in the terms of trade – higher commodity prices have boosted
export revenues for many countries
2. Improved governance – wider spread of democratic governments allied to
improved institutions e.g. more countries are able to issue bonds
3. Strongly increasing foreign direct investment – especially in agriculture,
mining, oil and gas, infrastructure, hotels/restaurants
4. Increasing intra-regional trade including manufactured goods – emergence
of key African regional trade hubs bolstered by infrastructure spending
5. Improved macroeconomic management – lower inflation, more credible
central banks, improved fiscal balances
6. Rising per capita incomes – growth of consumer markets – poverty rates
continue to fall but social progress has been uneven
7. There is some evidence that a growing number of African countries are
becoming less dependent on primary commodities and building a more
diversified manufacturing / services base for their economy.
Analysing Causes of Economic Growth in Africa

18. Building Trust / Social
Capital
Growing Intra-Regional
Trade
Improving Institutions
Growing a Dynamic
Private Sector
Sound Macro Policies to
control inflation
Focusing on addressing
Equity / Fairness
How Best to Sustain Economic Growth in the Long Run

19. Attractive rates of
corporation tax
Soft loans and tax
reliefs / other subsidies
Trade and Investment
Agreements
Flexible labour markets
Special Economic Zones
High quality
infrastructure
Open capital markets to
allow remitted profits
Availability of low cost
labour
Many countries rely on foreign direct investment (FDI) as a key
source of extra demand and as a driver of growth
Policies to attract Inward Foreign Investment

20. High rates of GDP growth can bring about undesirable economic
and social costs – much depends on the nature of growth
Risks of higher inflation and higher interest rates
• Fast-growing demand can lead to demand-pull and cost-push inflation –
this leads to a conflict between macro objectives
• The central bank may decide to raise interest rates to control inflation
Environmental effects
• More negative externalities such as pollution & waste
• Risk of unsustainable extraction of finite resources – i.e. fast growing
countries may cause a long-run depletion of natural resources
Inequalities of income and wealth
• Rapid increases in real national income can lead to a higher level of
inequality and social divisions
• Many of the gains from growth may go to only a few people
Economic and Social Costs of Growth

21. Greenhouse Gas and C02 Emissions in the UK
Greenhouse gas emissions in the UK from 2001 to 2014, (in million tonnes
carbon dioxide equivalent)
725
704 711 706 697 690 677
657
599 613
566
582 568
520
568
550 561 561 558 556 547 533
482
501
458
476 467
422
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
Milliontonnescarbondioxideequivalent
Greenhouse gas emissions Carbon dioxide emissions

22. Recent Economic Growth in the BRIC Countries
Source: HM-Treasury Databank
Brazil Russia India China
Year Per cent Per cent Per cent Per cent
2007 6.0 8.5 9.8 14.2
2008 5.0 5.2 3.9 9.6
2009 -0.2 -7.8 8.5 9.2
2010 7.6 4.5 10.3 10.4
2011 3.9 4.3 6.6 9.3
2012 1.8 3.4 5.1 7.8
2013 2.7 1.3 6.9 7.8
2014 0.1 0.6 7.2 7.4
2015

23. Main Sources of Economic Growth in China
China has experienced rapid growth over the last twenty years
helping to lift hundreds of millions of people out of deep poverty
• Real GDP growth in China has been over 9% per year since 1979
• 60-70% has come from increasing capital and labour inputs –
there has been a vast increase in capital investment spending
• 30-40% has come from rising factor productivity (i.e. increasing
efficiency in the allocation of labour & capital resources)
• Looking at increases in per capita output research finds that:
1. 11-14% from improving human capital (quality of labour)
2. 8-14% from improving allocative efficiency (e.g. moving from
state-owned businesses to private and from rural to urban)
3. 16-17% has come from the productivity-enhancing effects of
innovation – much of which has been the imitation of ideas

24. Growth Challenges for China in the Years Ahead
China is now in a period of transition away from the fast
export and investment-led growth of the last 20 years.
The service sector is likely to take a bigger share of GDP
in the years ahead. In 2014, it still accounted for less
than 50 per cent of Chinese national output.
Chinese Reform Challenges
1. More reliance on their
own domestic market
and less on exports
2. Raise consumption and
reduce inefficient
savings
3. Grow the private sector
and reduce distortions
from state-owned sector
4. Increase the pace of
innovation as imitation
limits are reached
5. Continue to integrate the
Chinese economy into
the global economic /
financial system. This
includes many more
Chinese firms going
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ShareofGDP
Agriculture Industry Services

25. Some Key Constraints on Economic Growth
Infrastructure
Gaps
Primary Export
Dependency
Macroeconomic
Instability
Endemic Conflict
and Corruption
Human Capital
Weaknesses
Insufficient
Private Savings
Natural Capital
being Depleted
Rising Income
Inequality
Although many developing countries have enjoyed rapid growth in
recent years, for others there are crucial growth constraints

26. Savings Gaps: Importance of Savings and Investment
Increase
national
savings
Increase in
net
investment
Larger
capital
stock
Rise in real
GDP / GNI
Increased
per capita
incomes
How a savings gap can limit
economic growth:
• In many smaller low-
income countries, high
levels of extreme
poverty make it almost
impossible to generate
sufficient savings to
provide the funds
needed to fund capital
investment projects.
• This increases reliance
on tied overseas aid
• Some countries borrow
heavily to fund capital
investment projects –
this can lead to a high
level of external debt

27. Deficiencies in Human Capital as Barrier to Growth
Human capital weakness
limits the positive impact of
capital investment
Investment increases the size of
the capital stock and helps to
achieve “capital deepening”
(more capital per worker) but
businesses need skills and
experience to make best use of
new technologies
In many countries there are acute
shortages of human capital
Some countries lose some of their
skilled workforce to other
countries through a brain drain
Investment in education and training to increase the quality of the
labour force and make people more flexible in the labour market

28. Economic Growth – Causes and Impact
EdExcel AS Economics 2.1.1 and 2.5.4