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Growth Policy

Growth Policy. Planning for Growth. Adding to Physical Capital – High rates of savings & investment spending Adding to Human Capital – Making education a priority Technology Progress – Translating scientific knowledge into practical use. Role of Government.

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Growth Policy

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  1. Growth Policy

  2. Planning for Growth • Adding to Physical Capital – High rates of savings & investment spending • Adding to Human Capital – Making education a priority • Technology Progress – Translating scientific knowledge into practical use

  3. Role of Government • Governments & Physical Capital – Direct role in building infrastructure & indirect role in making high rates of private investment spending possible • Governments & Human Capital – Government spending on primary & secondary education • Government & Technology – Important R & D done by government agencies

  4. Sustainable World Growth • Limited supply of natural resources & impact of growth on the environment • Differing views of sustainability center on 3 questions: • How large are supplies of key natural resources? • How effective will tech be in finding alternatives? • Can long-run growth continue in face of resource scarcity? • High prices for scarce resources are incentives for conservation & R & D into alternatives

  5. Economic Growth & the Environment • When effective environmental action is not in place, growth tends to increase human impact on the environment • Advanced counties tend to have better management • Environmental problems are negative externality • Businesses will only incur cost to fix environmental issues if government regulations force them to

  6. Long-Run Growth & PPC • Production of capital goods leads to outward shift of PPC • Over time, production of consumer goods without replenishment will lead to depreciation, shifting PPC inward • Governments promote long-run growth by investing in physical capital

  7. Long-Run Growth & AD-AS Model • LRAS reflects level of production when all prices are flexible • Actual real GDP is almost always fluctuating around YP • Long-run growth results in rightward shift of LRAS

  8. Comparing LR & SR Growth in Models On PPC: • Short-run changes show as a point on – or inside – the curve • Long-run changes result in shifts of the PPC On AD-AS: • Short-run changes result in shifts of AD or SRAS • Long-run changes result in shifts of LRAS

  9. Which of these leads to economic growth? Explain. • Govt subsidies & tax incentives for firms to research new, more efficient, production tech • Govt policy emphasizes education – grad rate rises from 70 to 85%, & literacy rate rises from 98 to 99.5% • Central bank expands MS to boost spending & recover from a recession • To combat high unemployment, govt lowers income taxes & increases military spending

  10. How will each of these affect economic growth? Why? • Increased taxes on businesses • Improved national highway system • R & D leads to improved technology • Education results in increased labor productivity • Expansionary policy lowers interest rates • Govt policy fails to prevent civil war • Regulations established to maintain natural resources at sustainable levels

  11. Use a correctly labeled AD-AS diagram to illustrate: • Short-run impact of increased productivity • Productivity gains that last into the long run and create real economic growth.

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