Unit 6

• It refers to the increase in real output of an economy in a year

• measured by percentage increase in real GDP

• represented by a mvt inside the PPC curve or nearer to the curve

• It refers to the increase in the economy’s productive capacity

• measured by the annual percentage increase of the economy’s capacity to produce

• represented by outward shift of PPC curve

refers to rate of growth that is sustained for a period of time, is broad-based across economic sectors and creates productive employment for majority of the country’s population.

• productive employment refers to employment yielding sufficient returns to labour to permit the worker and his/her dependents a level of consumption above the poverty line

• hence inclusive growth is achieved when economy experiences higher real output at stable prices without worsening income equality

• rate of growth sustained over a period of time and can be maintained without causing significant economic problems, particularly for the future generations

1. unsustainable growth

2. non-inclusive growth

3. persistently slow growth

4. negative growth

1. Improvements to budget balance. Budget balance is the difference between general govt revenues and expediture showing how much in a year govt spending is financed by revenue collected. During econ growth, national income rises and amount of tax revenue collected increases.

   • Firstly, amount of tax collected is directly related to national income. For e.g, personal income tax collected increases when national income increases. As households’ income rises, they move into a higher tax income bracket under a progressive tax system and hence pay a greater proportion of their income as taxes

   • secondly, the increase in household income increases purchasing power. This enables households to spend more on good and services assuming normal goods and increases amount of indirect tax collected. Additionally, the increase in demand for good and services increases firms’ profit and hence increase amount of corporate income tax collected. Furthermore, econ growth reduces unemployment thus reducing govt spending on unemployment benefits. This causes budget surplus where govt revenue > govt expenditure

2. Achieve macro goals

   Assuming economy is operating at spare capacity, rise in AD increases real output and actual growth is attained and rise in employment as firms hire more worker to increase production and output.

   An export-oriented economy will have favourable balance of trade up when the growth is generated by increase in export revenue.

1. Increase mSoL. There is increase in income. When an economy experiences econ growth, assuming rate of growth of GDP is faster than population growth, real GDP/capita increases and the purchasing power of household increases. This increases mSoL as households enjoy greater quantity of goods and services

2. Reduction in unemployment,increase NMsol. Assuming that economy is operating at spare capacity, increase in AD will increase real output and actual growth is attained as the economy is able to produce greater quantity of good and services. This increases aggregate demand for labour, thus creating jobs and reducing demand-deficient unemployment. This improves NMWB as there is greater job security and lower crime rate.

1. greater profits. With economic growth, households are able to spend more goods and services, thus increasing demand for goods produces by firms assuming the firms produce normal goods. Ceteris paribus, firms will have increased profits.

2. Greater incentive and ability to invest. A stable economic growth increases domestic and foreign firms’ confidence and consumer confidence which encourages firms to invest as there are likely profits. Investors’ confidence raises expected returns from yields, increasing incentive for firms to invest as Matginal Efficiency of Investment shifts to the right. Moreover, economic growth increased household savings. Assuming these savings are channeled efficiently to banks to fund entrepeneurs’ investments, this increases supply of loanable funds, causing i/r to fall. This increases incentive and ability of firms to invest

1. Trade off between current and future SoL. If economy is operating at full employment level, there will be an opportunity cost of achieving econ growth. To produce more captial goods to increase productive capacity, some resources will have to be moved from production of consumer goods to producing capital goods.This reduces the quantity of good and services and hence decrease MWB. However, this is a short run cost as since in the long un, there will be greater quantity of goods and services due to increased productive capacity, hence increasing future MWB.

2. Trade off between econ growth and stable prices. As countries achieve econ growth, one of the unintended consequences is inflation. Inflation is a period of sustained increases in GPL. Excessive increases in AD that is persistently greater than AS results in DD-pull inflation where excess deman cannot be met as resources are almost fully or fully used. This leads to increase in GPL without increase in real out put. This leads to rising costs on households and firms, losing price competitiveness of domestic businesses on the international market. This conflicts with govt’s goal of px stability and favourable BOT.

increase in G/ decrease in T to increase AD