SAJC 2024 Economic Growth Lecture Notes Students

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 Economic Growth In your first set of JC2 lecture notes , Standard of Living and Key Economic Indicators, you first learnt of a government’s four macroeconomic goals (sustainable and inclusive economic growth, price stability, low unemployment/full employment, favourable balance of trade). In this set of notes, we will explore the macroeconomic goal of sustainable and inclusive economic growth. Important concepts and tools and analysis  Actual and potential growth  Sustainable growth  Inclusive growth Key questions to consider 1. What are the different types of economic growth? 2. Why do governments want to achieve economic growth? 3. When economic growth happens in a country, why do we want to ensure everyone benefits? 4. What happens when countries experience undesirable rates of economic growth? 5. How do countries experience economic growth? How is this illustrated on a diagram?

St. Andrew’s Junior College Economics Department 2024 2 Contents 1. Economic growth ................................................................................................................................................................ 3 1.1. Actual Economic Growth ......................................................................................................................................... 3 1.1.1. How is actual economic growth illustrated? ................................................................................................... 3 1.2. Potential Economic Growth .................................................................................................................................... 5 1.2.1. How is potential economic growth illustrated? .............................................................................................. 5 1.3. Sustainable Economic Growth ............................................................................................................................... 6 1.3.1. How is sustained economic growth illustrated? .............................................................................................. 6 1.4. Inclusive Growth ....................................................................................................................................................... 8 2. Benefits of Achieving Economic Growth ........................................................................................................................ 9 2.1. Benefits of achieving sustainable growth ............................................................................................................ 9 2.2. Benefits of Inclusive Growth ................................................................................................................................. 10 3. Consequences of excessively high rates of economic growth ................................................................................ 11 4. Factors contributing to economic growth .................................................................................................................... 13 4.1. Factors affecting Aggregate Demand .............................................................................................................. 13 4.2. Factors affecting Short-Run Aggregate Supply .............................................................................................. 14 4.3. Factors affecting Long-Run Aggregate Supply ............................................................................................... 15 5. Evaluation: Should Countries pursue Happiness rather than the pace of Economic Growth? .......................... 16

CIRCULAR FLOW OF INCOME AND AGGREGATE DEMAND & AGGREGATE SUPPLY MODELS St. Andrew’s Junior College Economics Department 2024 3 What are the different types of economic growth? 1. Economic growth There are several types of economic growth and it is important for you to know the difference between them, how they are measured and what causes them. In responding to questions on economic growth, we typically discuss how different types of growth can be achieved. 1.1. Actual Economic Growth Actual economic growth is the increase in an economy’s level of real output over a given time period. Actual economic growth is usually measured by the rate of change of the real national income figures such as real Gross Domestic Product (GDP). % change in real GDP = 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃𝑡−𝑟𝑒𝑎𝑙 𝐺𝐷𝑃𝑡−1 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃𝑡−1 × 100% Measuring real GDP eliminates changes in GDP caused by changes in the general price level. Hence, changes in real GDP measure changes in output produced by the economy over that time period. An economy is said to have experienced actual growth when there is an increase in real GDP . This could be attained by a more efficient use of existing factors of production (that could have been previously underutilised or unemployed) within the economy to meet increased demand. 1.1.1. How is actual economic growth illustrated? A more efficient use of resources will move production from Point A to Point B, a point further away from the origin and closer to the Production Possibility Curve (PPC) as in Fig 1.1a or by an increase in real national income from Y1 to Y2 due to an increase in AD from AD1 to AD2 as in Fig 1.1b.

ECONOMIC GROWTH St. Andrew’s Junior College Economics Department 2024 4 Fig 1.1a: Illustration of Actual Economic Growth using PPC Fig 1.1b: Illustration of Actual Economic Growth using AD/AS Approach Actual growth may also arise from an increase in SRAS which results in an increase in real national output. Illustrate an increase in SRAS and identify factors that could cause the SRAS to increase. B Consumer goods Capital goods 0 A AD 1 General Price Level Real National Income 0 AS Y P1 P2 AD2 Y2 Yf (GPL)

ECONOMIC GROWTH St. Andrew’s Junior College Economics Department 2024 5 1.2. Potential Economic Growth Potential economic growth is the increase in the productive capacity of an economy. This growth is largely determined by the quantity and quality of factors of production and the level of technology prevailing within a country. Such growth affects the sustainability of actual economic growth. 1.2.1. How is potential economic growth illustrated? This increase in a country’s productive capacity may be illustrated by an outward shift of the country’s Production Possibility Curve (PPC) as shown in Fig 1.2a or a rightward shift of the long run aggregate supply (LRAS) curve from LRAS 1 to LRAS 2 resulting in an increase in productive capacity Yf to Y’f as shown in Fig 1.2b. Fig. 1.2a: Illustration of Potential Economic Growth using PPC Fig 1.2b: Illustration of Potential Economic Growth using AD/AS Approach Note: Potential economic growth which results in an increase in productive capacity Y f to Y’f as shown in Fig 1.2b above also results in actual growth shown by the increase in real national output from Y0 to Y1. PPC2024 PPC2020 Consumer goods Capital goods 0

ECONOMIC GROWTH St. Andrew’s Junior College Economics Department 2024 6 1.3. Sustainable Economic Growth Sustainable growth refers to economic growth that is sustained over a period of time (i.e., both actual and potential growth), without creating other significant economic p