High GROWTH: Causes: (Reasons)
1. Education, training and health care (Effective SSPs)
- Skills and Productivity (output per worker)
- Also, Occupational mobility (easy to switch jobs)
- High employability- lower level of Unemployment
- More AS- more goods are produced
- Also, Low unemployment means higher household income
- Higher Consumption
- Higher AD and Higher output (Diagram)
X Quality of Education and health care
X in the LR effects only
X What if very academic education system but not vocational
X White collar unemployment- over qualified
2. Export-Led Growth:
- If better factors of production or Natural resources
- E.g. land (oil), labour, capital and entrepreneur
- Therefore comparative advantage over other countries
- International competitiveness
- Export rise- component of AD- RO rise- high Growth
- Also, Export is an injection
- Faster circular flow of income hence growth at faster rate due to multiplier
effect
X Fear of over reliance on the other countries
X in the LR, if other competitors emerge- less demand for our goods in the
foreign market
X other country faces recession- less demand for our goods
X Also, too high exports means higher AD, demand pull inflation
resulting the lower international competitiveness (lower exports and low
growth in the LR)
NB: Lower exchange rate can also cause export-led growth (China, Ice Land)
3. High Investment:
- If lower interest rate (cheaper to borrow)
- lower corporation tax ( more retained profit)
- Both above are likely to encourage more firms to invest
- I- Component of AD (Diagram) AD increase and RO increase
51
, - Also, high investment will increase AS (Productivity is likely to increase
due to capital investment)
- Also, Investment is an injection
- Faster circular flow of income hence growth at faster rate due to multiplier
effect
X Too high investment In technology- automation
X workers are replaced by machines
X level of unemployment may increase
X lower confidence and less AD
X It may cause poor rate of economic Growth
4. High Consumption:
- High confidence level
- Positive wealth effect (high price of house, boom in stock market)
- Less incentive to save and more to spend
- Consumption could be higher due to lower interest rate and/or
Expansionary fiscal policy: lower income tax (less leakage and
faster rate of growth due to multiplier effect)
- C is a major component of AD (UK- 60-65%)
X Too high Consumption means too high AD
X Demand-pull inflation
X in order to have sustainable and stable growth rate, along with
AD, aggregate supply also need to increase
Evaluate High Growth rate:
Positives:
1. Increase in level of employment:
- Higher growth means more RO
- Also, High Growth- high national income (high Marginal Propensity to
Consume) so, higher AD and RO
- More workers are needed to produce more goods and services
- Derived demand for labour (more jobs- low unemployment)
- Govt. can raise more revenue and does not need to spend on benefits
- Overall, improve budget deficit and government debt
X Automation: what if more money has been invested in capital goods,
hence fewer workers are required to produce more goods and services
X Structural unemployment (if growth is due to the transition of sectors
e.g. primary to secondary)
52
,2. Growth helps to promote Economic Development
- As mentioned before, lower unemployment and budget surplus
- More funds available to spend of Economic Welfare
- For example: health care and education
- It will increase the quality of life and standard of living
- Promotes Economic development
- Improve HDI ranking in the international league table
- In other words, Growth finances Development (1/3rd of HDI)
X What if the government is corrupted
X what if the growth is due to money spent of military equipment or
capital goods instead of health and education (may not increase quality of
life and living standard in the SR)
3. Attracts FDI:
- High growth means high confidence level
- Positive relation between consumption and investment since expected rate
of return would be high
- Attract MNCs to come and invest in our economy due to high
international competitiveness e.g. China
- FDI- improve infrastructure, brings technology and skills
- Firstly, helps to promote economic development
- Also, FDI give more jobs to the domestic economy
- Finally, Export is an injection as FDI an inflow of funds from abroad, it
will faster circular flow of income hence growth at faster rate due to
multiplier effect
X If high growth is resulting demand-pull inflation and instability, may
discourage MNCs
X Also, FDI may harm the domestic firms in the LR as large MNC may
be able to charge low prices due to Economies of scale
4. More funds are available to invest:
- Accelerator Effect (higher national income that means more money
available to invest)
- Investment will increase the productive potential
- For example: Technology advancement, more R&D on renewable
resources
- LRAS will increase ( Growth- Diagram)
53
, - Overall, real output will increase at a low inflation
- This should increase the international competitiveness
X However, if excess funds are invested abroad or used to buy imported
goods may not increase the international competitiveness of an economy
However, Negatives:
1. Inflation:
- In the SR, higher AD, if economic growth is due to higher Consumption
or exports
- Higher PL and Demand-pull Inflation (Diagram)
- This may reduce the international competitiveness e.g. Chinese firms are
moving to Sri Lanka and Bangladesh
- High inflation lowers the value of money, hence high cost of living and
Standard of living may go down
- Especially, fixed income earners feel the real pressure of high inflation
X If growth is due to improvement in productive potential such as
education and training etc. (LRAS will increase and inflation rate is likely
to decrease)
2. Inequality:
- Higher Growth means higher investment (accelerator effect)
- Rich gets more opportunities to invest- if capital investment, workers may
get replaced by machines
- Widen the distribution of income and wealth
- Therefore wider gap between rich and poor
- Poor may fall in vicious circle of poverty
- Hence, overall high poverty level and low SOL and low economic
development
X higher growth means lower unemployment
X more household income (narrow Gap between rich and poor)
3. Environmental Issues:
- Higher Growth due to industrialisation
- More manufacturing/production
- More pollution
- Also, over use of non-renewable resources/ natural resources
- Depletion of resources and unsustainability
- It adversely affects forthcoming generation
54
, Objective: Unemployment
Meaning: People who are able and available and are actively seeking for a job for the
last four weeks, and are prepared to start work in the next two weeks, and are not
working.
Measure: Claimant count i.e. benefits seekers (JSA) and LFS – Labour force survey of
randomly picked 60,000 households by ILO i.e. international labour organisation.
Evaluate the measure:
o Fraud seekers (people who work and claim)
o Pride issues e.g. some may not be at work but ashamed to claim benefits
o Eligibility criteria for JSA (Must be over 18, Can’t have more than £8000
savings, Household income must not exceed £30 000)
o LFS is only on the basis of 60,000 household
o The survey may be biased
o The information published can be outdated
High Unemployment:
Causes: (Reasons/Types)
1. Less incentives to work:
- Too high Income tax or too low NMW
- Too generous welfare system- Benefits
- Less opportunity cost of not working (High Benefits)
- Less motivation for people to actively seek for a job
- Also, Poor infrastructure could put people off
- E.g. Poor transport links- Geographical immobility
- Overall, less people are at work- high unemployment
X Low NMW will encourage firms hire more workers as compared to too
high NMW where firms are not interested to hire more staff
X Also, NMW does not mean that firms cannot offer more wages to attract
more workers. Majority of the jobs pay higher than NMW
X Also, High tax with very low benefits may not leave enough choice for
people- forced to work
59
, 2. Structural Unemployment
- Economy’s infrastructure has been changed
- Moving sectors or industries abroad
- In order to lower cost of production- Outsourcing
- E.g. Coal Industry and Manufacturing Sector have moved abroad from
Britain
- Less Jobs available
- Also, Technology may replace workers
- For example: London transport is replacing workers with the interactive
and Hi-Tech ticket machines
X Depends upon the occupational mobility i.e. switching jobs
X Depends upon the reliance on the particular industry
3. Lack of Education, Training and Health Care
- Poor govt. intervention or Corruption
- Less education (affordability) or poor education i.e. less vocational skills-
Low ability
- Low productivity- Less employability
- Also, Lack of Training- occupational immobility
- Less likely to switch jobs (frictional unemployment– in between two jobs)
- Poor health care can cause less ability to work/ unable to work
- Overall: people are either not able to work or unable to find a suitable jobs
once made redundant
X Firstly, employer does have to pay as much for low skilled workforce –
more demand for workers especially if work does not require high skills
X It may attract FDI and more jobs if MNCs require low skilled
workforce at low wage cost
4. Lower Growth Rate:
- If Cost Push inflation (higher VAT, higher NMW etc.)
- Too High COP- Decrease in AS High PL & less RO
- Firms will make people redundant- Derived demand of labour (indirect
demand). Also known as Cyclical unemployment (Recession)
- Also, If any component of AD decreases-less export- means lower AD -
Less RO e.g. Spain
- Less demand for workers to produce goods and services
- Overall, High unemployment due to Lower AD/AS
X If due to lower growth rate net migration (people leaving a country)
increases it may not increase the rate of unemployment.
60
1. Education, training and health care (Effective SSPs)
- Skills and Productivity (output per worker)
- Also, Occupational mobility (easy to switch jobs)
- High employability- lower level of Unemployment
- More AS- more goods are produced
- Also, Low unemployment means higher household income
- Higher Consumption
- Higher AD and Higher output (Diagram)
X Quality of Education and health care
X in the LR effects only
X What if very academic education system but not vocational
X White collar unemployment- over qualified
2. Export-Led Growth:
- If better factors of production or Natural resources
- E.g. land (oil), labour, capital and entrepreneur
- Therefore comparative advantage over other countries
- International competitiveness
- Export rise- component of AD- RO rise- high Growth
- Also, Export is an injection
- Faster circular flow of income hence growth at faster rate due to multiplier
effect
X Fear of over reliance on the other countries
X in the LR, if other competitors emerge- less demand for our goods in the
foreign market
X other country faces recession- less demand for our goods
X Also, too high exports means higher AD, demand pull inflation
resulting the lower international competitiveness (lower exports and low
growth in the LR)
NB: Lower exchange rate can also cause export-led growth (China, Ice Land)
3. High Investment:
- If lower interest rate (cheaper to borrow)
- lower corporation tax ( more retained profit)
- Both above are likely to encourage more firms to invest
- I- Component of AD (Diagram) AD increase and RO increase
51
, - Also, high investment will increase AS (Productivity is likely to increase
due to capital investment)
- Also, Investment is an injection
- Faster circular flow of income hence growth at faster rate due to multiplier
effect
X Too high investment In technology- automation
X workers are replaced by machines
X level of unemployment may increase
X lower confidence and less AD
X It may cause poor rate of economic Growth
4. High Consumption:
- High confidence level
- Positive wealth effect (high price of house, boom in stock market)
- Less incentive to save and more to spend
- Consumption could be higher due to lower interest rate and/or
Expansionary fiscal policy: lower income tax (less leakage and
faster rate of growth due to multiplier effect)
- C is a major component of AD (UK- 60-65%)
X Too high Consumption means too high AD
X Demand-pull inflation
X in order to have sustainable and stable growth rate, along with
AD, aggregate supply also need to increase
Evaluate High Growth rate:
Positives:
1. Increase in level of employment:
- Higher growth means more RO
- Also, High Growth- high national income (high Marginal Propensity to
Consume) so, higher AD and RO
- More workers are needed to produce more goods and services
- Derived demand for labour (more jobs- low unemployment)
- Govt. can raise more revenue and does not need to spend on benefits
- Overall, improve budget deficit and government debt
X Automation: what if more money has been invested in capital goods,
hence fewer workers are required to produce more goods and services
X Structural unemployment (if growth is due to the transition of sectors
e.g. primary to secondary)
52
,2. Growth helps to promote Economic Development
- As mentioned before, lower unemployment and budget surplus
- More funds available to spend of Economic Welfare
- For example: health care and education
- It will increase the quality of life and standard of living
- Promotes Economic development
- Improve HDI ranking in the international league table
- In other words, Growth finances Development (1/3rd of HDI)
X What if the government is corrupted
X what if the growth is due to money spent of military equipment or
capital goods instead of health and education (may not increase quality of
life and living standard in the SR)
3. Attracts FDI:
- High growth means high confidence level
- Positive relation between consumption and investment since expected rate
of return would be high
- Attract MNCs to come and invest in our economy due to high
international competitiveness e.g. China
- FDI- improve infrastructure, brings technology and skills
- Firstly, helps to promote economic development
- Also, FDI give more jobs to the domestic economy
- Finally, Export is an injection as FDI an inflow of funds from abroad, it
will faster circular flow of income hence growth at faster rate due to
multiplier effect
X If high growth is resulting demand-pull inflation and instability, may
discourage MNCs
X Also, FDI may harm the domestic firms in the LR as large MNC may
be able to charge low prices due to Economies of scale
4. More funds are available to invest:
- Accelerator Effect (higher national income that means more money
available to invest)
- Investment will increase the productive potential
- For example: Technology advancement, more R&D on renewable
resources
- LRAS will increase ( Growth- Diagram)
53
, - Overall, real output will increase at a low inflation
- This should increase the international competitiveness
X However, if excess funds are invested abroad or used to buy imported
goods may not increase the international competitiveness of an economy
However, Negatives:
1. Inflation:
- In the SR, higher AD, if economic growth is due to higher Consumption
or exports
- Higher PL and Demand-pull Inflation (Diagram)
- This may reduce the international competitiveness e.g. Chinese firms are
moving to Sri Lanka and Bangladesh
- High inflation lowers the value of money, hence high cost of living and
Standard of living may go down
- Especially, fixed income earners feel the real pressure of high inflation
X If growth is due to improvement in productive potential such as
education and training etc. (LRAS will increase and inflation rate is likely
to decrease)
2. Inequality:
- Higher Growth means higher investment (accelerator effect)
- Rich gets more opportunities to invest- if capital investment, workers may
get replaced by machines
- Widen the distribution of income and wealth
- Therefore wider gap between rich and poor
- Poor may fall in vicious circle of poverty
- Hence, overall high poverty level and low SOL and low economic
development
X higher growth means lower unemployment
X more household income (narrow Gap between rich and poor)
3. Environmental Issues:
- Higher Growth due to industrialisation
- More manufacturing/production
- More pollution
- Also, over use of non-renewable resources/ natural resources
- Depletion of resources and unsustainability
- It adversely affects forthcoming generation
54
, Objective: Unemployment
Meaning: People who are able and available and are actively seeking for a job for the
last four weeks, and are prepared to start work in the next two weeks, and are not
working.
Measure: Claimant count i.e. benefits seekers (JSA) and LFS – Labour force survey of
randomly picked 60,000 households by ILO i.e. international labour organisation.
Evaluate the measure:
o Fraud seekers (people who work and claim)
o Pride issues e.g. some may not be at work but ashamed to claim benefits
o Eligibility criteria for JSA (Must be over 18, Can’t have more than £8000
savings, Household income must not exceed £30 000)
o LFS is only on the basis of 60,000 household
o The survey may be biased
o The information published can be outdated
High Unemployment:
Causes: (Reasons/Types)
1. Less incentives to work:
- Too high Income tax or too low NMW
- Too generous welfare system- Benefits
- Less opportunity cost of not working (High Benefits)
- Less motivation for people to actively seek for a job
- Also, Poor infrastructure could put people off
- E.g. Poor transport links- Geographical immobility
- Overall, less people are at work- high unemployment
X Low NMW will encourage firms hire more workers as compared to too
high NMW where firms are not interested to hire more staff
X Also, NMW does not mean that firms cannot offer more wages to attract
more workers. Majority of the jobs pay higher than NMW
X Also, High tax with very low benefits may not leave enough choice for
people- forced to work
59
, 2. Structural Unemployment
- Economy’s infrastructure has been changed
- Moving sectors or industries abroad
- In order to lower cost of production- Outsourcing
- E.g. Coal Industry and Manufacturing Sector have moved abroad from
Britain
- Less Jobs available
- Also, Technology may replace workers
- For example: London transport is replacing workers with the interactive
and Hi-Tech ticket machines
X Depends upon the occupational mobility i.e. switching jobs
X Depends upon the reliance on the particular industry
3. Lack of Education, Training and Health Care
- Poor govt. intervention or Corruption
- Less education (affordability) or poor education i.e. less vocational skills-
Low ability
- Low productivity- Less employability
- Also, Lack of Training- occupational immobility
- Less likely to switch jobs (frictional unemployment– in between two jobs)
- Poor health care can cause less ability to work/ unable to work
- Overall: people are either not able to work or unable to find a suitable jobs
once made redundant
X Firstly, employer does have to pay as much for low skilled workforce –
more demand for workers especially if work does not require high skills
X It may attract FDI and more jobs if MNCs require low skilled
workforce at low wage cost
4. Lower Growth Rate:
- If Cost Push inflation (higher VAT, higher NMW etc.)
- Too High COP- Decrease in AS High PL & less RO
- Firms will make people redundant- Derived demand of labour (indirect
demand). Also known as Cyclical unemployment (Recession)
- Also, If any component of AD decreases-less export- means lower AD -
Less RO e.g. Spain
- Less demand for workers to produce goods and services
- Overall, High unemployment due to Lower AD/AS
X If due to lower growth rate net migration (people leaving a country)
increases it may not increase the rate of unemployment.
60
