Macroeconomics Aims Notes

H2 Economics Chapter 7, 8, 9, 10 and 14 Notes This document is intended as a study guide to provide a structure for studying the Chapter 7, 8, 9, 10 and 14 Notes. 1 Economic Growth 1.1 Desirable Economic Growth Governments aim for high economic growth in order to increase the standard of living (SOL) of their country. Recall that improving SOL is the singular most important part of macroeconomics. Hence, economic growth is also sometimes considered as the primary macroeconomic aim. Economic Growth is an increase in the real national output of a country over a period of time. Actual Growth is the percentage annual increase in real national output actually produced. Potential Growth is the rate of growth of full employment output and capacity of the economy to produce goods and services. Economic Growth = (Real GDP year 1 - Real GDP year 0 ) / Real GDP year 0 Will this be able to continue after a long period of time? Consider an economy experiencing a continuous increase in real national output without any increases in productive capacity. After a long period of time, the economy will be producing at its productive capacity, meaning that there can no longer be economic growth. To allow for further growth, the government aims to achieve Sustained Economic Growth. Sustained Growth is economic growth with low inflation for a long period of time. This can be achieved when actual economic growth caused by an increase in AD 1 is slightly faster than the potential economic growth caused by an increase in LRAS. 1 Actual Growth can be achieved via an increase in SRAS. However, it is typically achieved when AD increases. 1

H2 Economics 2024 Chapter 7/8/9/10/14 Sustained Growth allows the government to continue to increase national output over a long period of time since the productive capacity of the economy continues to increase, allowing for future increases in the production of output. Will this be able to continue forever? This is not the best possible outcome. Governments aim for high economic growth as it causes a continual increase in SOL. However, since production results in negative externalities which decrease non-material SOL to increase material SOL, future generations will be subjected to the negative effects of global warming, air pollution and other phenomena which damage the environment, decreasing their SOL. Hence, governments aim for Sustainable Economic Growth. Sustainable Growth is sustained growth which dictates that growth does not damage the environment or deplete natural resources excessively to avoid affecting future generations negatively. Will this benefit everyone in society? This is not ideal. Recall that the word “average” is used in the definition of SOL. If the benefits of economic growth are enjoyed by only the rich minority and the poor minority does not benefit, then it is inequitable. Hence, governments aim for inclusive economic growth. Inclusive Growth is economic growth which everyone has the opportunity to participate in and the benefits of economic growth are equitably distributed among the people such that no particular segments of the population are excluded from the benefits. “Equitable” is not the same as "Equal". “Equal” refers to treating everyone the same, regardless of individual differences or circumstances. "Equitable" refers to fairness in the distribution of opportunities and treatment, after considering individual differences and circumstances. It is the ideal that meritocracy aims to achieve. Hence, governments aim for sustainable and inclusive economic growth . However, it is important to note that all governance requires trade-offs. This ideal is not something that is achievable by all countries due to a multitude of reasons. As such, many countries simply aim for economic growth in general. Hence, let us consider if economic growth is good or bad. 2

H2 Economics 2024 Chapter 7/8/9/10/14 1.2 Achieving Sustainable and Inclusive Growth Sustainable Growth With an increase in national income, households and firms also pay greater income tax and corporate tax to the government respectively. Hence, the government may have a greater budget and hence increased ability to invest in and use renewable energy sources to prevent resource depletion , and also mitigate the problem of pollution . Hence, future generations will not have to suffer the adverse consequences of such issues, thus the economic growth can be said to be more sustainable. With an increase in national income, households purchase more goods and services from firms, increasing firms’ profits. Hence, firms’ may use their stored profits to invest in and start using renewable energy sources to be more attractive to younger consumers who prefer sustainably produced goods and services, as these consumers want to prevent resource depletion and mitigate the problem of pollution . Hence, future generations will not have to suffer the adverse consequences of such issues, thus the economic growth can be said to be more sustainable. Inclusive Growth This can be achieved when countries implement a progressive tax system where those earning higher income pay more taxes coupled with a subsidy system where the lower income would receive more subsidies compared to the higher income, narrowing income gaps. Hence, the poor majority would have increased purchasing power to spend on more goods and services to consume to satisfy their wants and needs, increasing material SOL. Additionally, the government may use the tax revenue from the minority rich to spend on public and merit goods such as public transport and healthcare. This ensures that even the poor majority is able to afford to travel more efficiently and obtain treatment for illnesses. This would improve the comfort of travelling and health, hence increasing non-material SOL. With an increase in national income, households and firms also pay greater income tax and corporate tax to the government respectively. Hence, the government may have a greater budget and hence increased ability to invest in programmes to connect people to the opportunities that exist in the market, such that they fulfil their potential . (E.g. Skillsfuture) 3

H2 Economics 2024 Chapter 7/8/9/10/14 1.3 Impact of Sustainable and Inclusive Growth Effect of Sustainable Growth Key Analysis/Technical Terms Economic Growth Sustainable Growth Good: Less preoccupied with private