Embed Size (px)
DESCRIPTION
Macroeconomics
Citation preview
Navigation ²
Factors Affecting Economic Growthby Tejvan Pettinger on February 22, 2011 in economics
Economic growth is an increase in real GDP. It means an increase in the value of goods
and services produced in an economy. The rate of economic growth measures the annual
percentage increase in real GDP. There are several factors affecting economic growth, but
it is helpful to split them up into:
Demand side factors
Supply side factors
Recent Economic Growth in UK
Demand Side Factors Influence Growth of Aggregate
Demand (AD)
AD= C+I+G+X-M. Therefore a rise in Consumption, Investment, Government spending or
exports can lead to higher AD and higher economic growth.
Graph Showing Rise in AD
What Could Affect AD?
Interest Rates. Lower interest rates would make borrowing cheaper and should
encourage firms to invest and consumers to spend. People with mortgages will have
lower monthly mortgage payments so more disposable income to spend. However,
recently we had a period of zero interest rates, but due to low confidence and
reluctant banks growth was still sluggish.
Consumer Confidence. Consumer and business confidence is very important for
determining economic growth. If consumers are confident about the future they will
be encouraged to borrow and spend. If they are pessimistic they will save and reduce
spending.
Asset Prices. Rising house prices create a positive wealth effect. People can
remortgage against the rising value of their home and this encourages more consumer
spending. House prices are an important factor in the UK, because so many people are
homeowners.
Real Wages. Recently, the UK has experienced a situation of falling real wages.
Inflation has been higher than nominal wage, causing a decline in real incomes. In
this situation, consumers will have to cut back on spending reducing their purchase of
luxury items.
Value of Exchange Rate. If the Pound devalued, exports would become more
competitive and imports more expensive. This would help to increase demand for
domestic goods and services. A depreciation could cause inflation, but in the short
term at least it can provide a boost to growth.
Banking Sector. The 2008 Credit crunch showed how influential the banking sector
can be in determining investment and growth. If the banks lose money and no longer
want to lend, it can make it very difficult for firms and consumers leading to a decline
in investment.
Factors that determine Long Run Economic Growth
In the long run, economic growth is determined by factors which influence the growth of
Long Run Aggregate Supply (the PPF of the economy). If there is no increase in LRAS,
then a rise in AD will just be inflationary.
This graph shows an increase in LRAS and AD, leading to an increase in economic growth
without inflation.
LRAS can be influenced by
1. Levels of infrastructure. Investment in roads, transport and communication can
help firms reduce costs and expand production. Without necessary infrastructure it
can be difficult for firms to be competitive in the international markets. This lack of
infrastructure is often a factor holding back some developing economies.
2. Human Capital. Human capital is the productivity of workers. This will be
determined by levels of education, training and motivation. Increased labour
productivity can help firms take on more sophisticated production processes and
become more efficient.
3. Development of Technology. In the long run development of new technology is a
key factor in enabling improved productivity and higher economic growth.
Other Factors that Can Affect Growth in the Short Term.
Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a
shock to growth. It causes SRAS to shift to the left leading to higher inflation and
lower growth.
Political Instability. Political instability can provide a negative shock to growth.
Weather. The exceptionally cold December in UK 2010, led to a shock fall in GDP
Annual Rate of Economic Growth in UK
Examples of Economic Growth
A graph showing Quarterly economic growth in UK.
In 1981 and 1991, there are two periods of negative economic growth. In 1981, this
negative economic growth was due to:
Higher interest rates (reducing borrowing)
Lower government spending (tight fiscal policy)
Appreciation in the value of the pound which made exports uncompetitive.
In the mid 1980s, the high economic growth was caused by
Rising consumer confidence
Relatively low real interest rates
Rising wages
Rising house prices causing a rise in wealth and consumer spending
Genuine Progress Indicator GPI v GDP Factors Affecting Current Account Deficit
Graph Showing Annual Growth in UK
In 2009, the sharp fall in Real GDP (negative economic growth) was caused by:
Higher oil prices reducing living standards
Global credit crunch leading to a fall in bank lending and investment
Fall in house prices causing lower wealth and spending
Related
Causes of Economic Growth
Sustainable economic growth
< >
Trackbacks/Pingbacks
Leave a Reply
Name (required)
Email (w ill not be published) (required)
Website
Economics Help Revision
What Explains Differences in Economic Growth Rates? | Economics Blog - November 22, 2012
[...] Factors that determine economic growth [...]
Economic Growth Stats | Economics Blog - October 25, 2012
[...] Factors affecting economic growth [...]
AD-AS Model Explained « EconProph - March 2, 2011
[...] since we’re starting on the Aggregate Demand-Aggregate Supply (AD-AS) model this week. From
EconomicsHelp.org: Economic growth is an increase in real GDP. It means an increase in the value of
goods and [...]
Submit CommentSubmit Comment
Other items from Economics Help.org Shop
Economics Help Email
Receive latest news, blogs and updates
Name:
Email:
Submit
Understanding Economics
My E-book - Understanding Real World Economics.
Tags
a-level amazon as unit 1 austerity balance of payments banks benefits bond yields
business cpi crisis debt economic growth economics elasticity environment euroeuro crisis europe exchange rates finance forecasts globalisation graphs india
inequality inflation investment italy labour markets living standards mortgages petrol portugal
quantitative easing recession retail savings stats tax tax evasion uk economyunemployment us economy wages
Recommended Reading
Economic Books - at Amazon.co.uk
Economic Books - at Amazon.com
Selected Posts
Economic History
Causes of Wall Street Crash 1929
Causes of Great Depression
UK economy in 1920s
UK Economy of 1970s
UK Economy - 1980s
Keynesian Economics
Economics in Real World
Impact of Immigration on UK economy
The problem of printing money
Policies for reducing unemployment
Euro Debt crisis explained
The Importance of Economics
Understanding Exchange Rates
Top 10 reasons for studying economics
Debates
Should UK join the Euro?
Pros and cons of Heathrow expansion
Pros and cons of High Speed 2
Pros and cons of austerity
Pros and cons of a fat tax
Books
Recommended reading
Contact
Ask Question
Privacy Policy and Cookies
Archives
Select Month
Categories
Select Category
Tejvan R Pettinger
Tejvan studied PPE at LMH, Oxford University and works as a writer / blogger / cyclist
Read More
© 2013 Economics Blog. All Rights Reserved.
Powered by WordPress. Designed by
