Economic Growth

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Economic Analysis
MBA / MPA Solved Assinment No 2
Topic No 1 Helping Material
Many scientists believe that we are rapidly depleting our natural resources. Assume that there are only two inputs (labour and natural resources) producing two goods (musical concerts and gasoline) with no improvement in society over time. Show what would happen to the PPF over time as natural resources are exhausts. How would invention and technological improvements modify your answer? On the basis of this example, explain why it is said “economic growth is a race between depletion and invention.

AS Macroeconomics / International Economy
Economic Growth
Growing economies provide the means for people to enjoy better living standards and for more of us to find work. But what is economic growth and how best can a country achieve it? Defining economic growth

Economic growth is best defined as a long-term expansion of the productive potential of the economy. Sustained economic growth should lead higher real living standards and rising employment.  Short term growth is measured by the annual % change in real GDP. Growth and the Production Possibility Frontier

An increase in long run aggregate supply is illustrated by an outward shift in the PPF.

Advantages of Economic Growth
Sustained economic growth is a major objective of government policy – not least because of the benefits that flow from a growing economy. * Higher Living Standards – for example measured by an increase in real national income per head of population – see the evidence shown in the chart below * Employment effects: Growth stimulates higher employment. The British economy has been growing since autumn 1992 and we have seen a large fall in unemployment and a rise in the number of people employed. * Fiscal Dividend: Growth has a positive effect on government finances - boosting tax revenues and providing the government with extra money to finance spending projects * The Investment Accelerator Effect: Rising demand and output encourages investment in new capital machinery – this helps to sustain the growth in the economy by increasing long run aggregate supply. * Growth and Business Confidence: Economic growth normally has a positive impact on company profits & business confidence – good news for the stock market and also for the growth of small and large businesses alike Rising national income boosts living standards

And an expanding economy provides the impetus for a rising level of employment and a falling rate of unemployment. This has certainly been the case for the British economy over the last decade.

Disadvantages of economic growth
There are some economic costs of a fast-growing economy. The two main concerns are firstly that growth can lead to a pick up in inflation and secondly, that growth can have damaging effects on our environment, with potentially long-lasting consequences for future generations. * Inflation risk: If the economy grows too quickly there is the danger of inflation as demand races ahead of aggregate supply. Producer then take advantage of this by raising prices for consumers * Environmental concerns: Growth cannot be separated from its environmental impact. Fast growth of production and consumption can create negative externalities (for example, increased noise and lower air quality arising from air pollution and road congestion, increased consumption of de-merit goods, the rapid growth of household and industrial waste and the pollution that comes from increased output in the energy sector) These externalities reduce social welfare and can lead to market failure. Growth that leads to environmental damage can have a negative effect on...
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