Possible causes of economic growth

Causes of economic growth

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  • Possible causes of economic growth
    • Recovery
      • Measured by annual % change in real national output
        • Can be incorrect if income rises but this is due to hot money flows or inward income disguised as exports (e.g. with China)
  • Long-term growth
    • Possible causes of economic growth
      • Recovery
        • Measured by annual % change in real national output
          • Can be incorrect if income rises but this is due to hot money flows or inward income disguised as exports (e.g. with China)
    • Shown by increase in trend/potential GDP and shift in LRAS
  • Caused by increase in AD
    • If an econ is operating below productive potential i.e. within PPF
  • Def: Long-term expansion of a country's productive potential
    • Can also be due to shift in SRAS
      • Which uses up idle resources like labour
    • Can be from fiscal stimulus (Keynesian ) to stimulate AD and decrease demand-deficient Un. Can cause temporary growth but may be unsustainable with large deficit
      • Caused by increase in AD
        • If an econ is operating below productive potential i.e. within PPF
    • Can differ greatly between 'emerging' market economies and already developed countries. China and India ---> fast growing but slowing recently. UK --> far slower growing.
      • Long-term growth
        • Shown by increase in trend/potential GDP and shift in LRAS
    • Variations for growth rates of dif economies depending on business cycle and whether developed or 'catching up'
      • Economic stability and sound macro policy
        • Increased labour activity and participation
          • Increased labour productivity
            • Investment in physical capital
              • Improved human capital
                • Enterprise
                  • Firms produce more if expect D to rise at stable rate
                    • Economic stability and sound macro policy
                    • Fluctuations lead to uncertainty and policies aimed at stability create good environment for business investment
                      • relaxed attitudes to women working
                        • Increased labour activity and participation
                        • flexible working practices
                          • incentives in tax system
                            • tougher benefits
                              • retraining schemes for occupational mobility
                                • greater output per worker p.h.
                                  • Increased labour productivity
                                  • more technology
                                    • Investment in physical capital
                                    • Education and training
                                      • Improved human capital
                                      • Low tax of business profits and wealth
                                        • tax relief for R&D
                                          • tougher competition policy
                                            • encouraging foreign investment inward bringing best practice from our int'l competitors
                                              • encouraging macro stability

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