Economic Growth (Macroeconomics)

Economic growth is when an economies Real GDP increases, so a sustained increase in real output and income in a period of time. It can be shown by an outward shift on a PPF curve or a rightward shift of AD on an AD/AS diagram, providing there's enough spare capacity in the economy.

Economic growth is caused by anything that increases AD, providing there is enough spare capacity available. What also causes it is increases in the efficiency in using factors of production. What can cause this is improvement in education and training, improving labour mobility, increasing competition and obtaining more factors of production.

The benefits of economic growth include:

• Increased output, employment and income.
• Improved standard of living.
• Improved health, education and public services.

However, there also costs of economic growth. These are:

• Degrading of the environment by using up resources and creating waste.
• Increased stress and a faster pace of life.
• Increased inequality, difference between rich and poor.

That's the basics of economic growth, you can come to your own conclusion about whether it is desirable in large quantities etc. Thanks.

Aggregate Demand & Supply (Macroeconomics)

A classic AD/AS diagram has two axis. On the y axis (vertical one) we have price levels. Reading of this axis we will be able to see if the price levels in the economy have increased or decreased, thus seeing if there's been inflation or deflation in the economy. On the x axis (horizontal one) we have real GDP. The real part just means the figure has been adjusted slightly so it's in line with inflation. From the axis we will be able to read off the GDP of the economy so we can determine whether the economy has grown or shrunk. Also, we can determine from this axis whether unemployment has risen or fallen.

When we bring both aggregate demand and aggregate supply together and model them on the same diagram the two curves cross. This point is know as the macroeconomic equilibrium. This means both aggregate demand and aggregate supply are equal. 3 of the Governments's main objectives are to achieve full employment, low and stable inflation and to achieve steady economic growth. All of these can be viewed on an AD/AS diagram. Here is a standard AD/AS diagram:

As you can see, the AD curve hits the LRAS curve at the point where the LRAS curve begins to become vertical. This means that full employment has been achieved, or thereabouts. If AD was to shift to the left, it would mean unemployment has increased and the government would have to attempt to stimulate aggregate demand again to increase employment. It would do this by increasing any of the factors... (AD = C+I+G+(X-M)).

The government set the Bank of England the objective of stable prices (a target of 2% inflation). For this to be achieved, aggregate demand must not exceed the point of full employment on the diagram. If this would happen, you can see that price levels would increase dramatically and price levels rising is inflation.

To achieve economic growth, the AD curve would need to shift to the right - meaning Real GDP will have increased. To achieve this growth without inflation, the LRAS curve would need to shift to the right as well as the AD curve if the economy was operating at full employment. This would create some extra capacity for the economy to expand into.

There you have the three government objectives displayed and explained on a diagram. That's it for AD/AS diagrams.. Refer back to the individual posts about aggregate demand or aggregate supply if you're confused. Next up will be a short introduction to the multiplier effect. Thanks.

Aggregate Supply (Macroeconomics)

So, what is aggregate supply?
Well, aggregate supply is the total output of goods and services that producers in an economy are willing and able to supply at different price levels in a given time period. Aggregate supply can be modeled on a diagram in two ways: the long run and the short run.

In this diagram we have a long run aggregate supply curve, sometimes shortened to just 'LRAS'. We can see that initially supply increases as the price level increases as businesses stand to make more profit. The curve then hits at vertical point. This point is know as full employment. What this means is that all factors of production are fully employed so there can be no more growing. So, after this point the only change that occurs is the increase in price levels. The point of full employment is similar to operating on the edge of the PPC which was described in a previous post. The next post will go into further detail about the long run diagrams. 

Another way aggregate supply can be modeled is in the short run. 

Here we have aggregate supply in the short run, sometimes referred to as just 'AS'. In this the curve is simply sloping upwards as factors of production ca easily be increased or improved in the short run. The AS may increase (shift to the right on the diagram) if there are falls in production costs or a fall in wages. It may decrease (shift to the left on the diagram) if production costs increase or something like the price of oil increase. 

Going back to the long run aggregate supply curve now. It has the potential to shift if aggregate supply changes. 

The causes of changes in the LRAS curve are:

• A fall in interest rates. This will encourage businesses to invest therefore allowing them to expand and increase supply. This will shift LRAS to LRAS 1 on the diagram. If interest rates rose the opposite would happen and we could end up at curve LRAS 2 on the diagram.
• Unemployment related benefits could be reduced. This would encourage more to try and get back into work, thus giving more potential labour for firms. This will increase LRAS to LRAS 1. The opposite would happen if unemployment related benefits were increased.
• Education and training will improve the productivity of the workforce.. pushing LRAS out to LRAS 1. If funding for education and training was cut then LRAS may fall to curve LRAS 2.

That's pretty much it for a brief overview of aggregate supply. In the next post i'll be looking at aggregate supply and aggregate demand together and how these can be modeled on one diagram. Thanks for reading!