Does economic growth always result in a decrease in unemployment? Watch

Brian Moser
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If an economy experiences economic growth, does that mean an increase in national output - or just an increase in potential national output? Like, could economic growth just result in a widening of the output gap, rather than an increase in output - thus meaning that there would be no reduction in unemployment due to growth?

I'm getting rather confused right now; I hope my question is coherent enough for you to understand...

Thanks
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Johnpeters
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(Original post by Brian Moser)
If an economy experiences economic growth, does that mean an increase in national output - or just an increase in potential national output? Like, could economic growth just result in a widening of the output gap, rather than an increase in output - thus meaning that there would be no reduction in unemployment due to growth?

I'm getting rather confused right now; I hope my question is coherent enough for you to understand...

Thanks
Yes as consumption led growth would mean that there is greater domestic demand and so more workers are needed. If there is export led growth then there is increased demand from abroad and so more workers are needed. Economic growth when shown by an increase in AD on the LRAS curve shows just an increase in national output, not potential. When economic growth is achieved through LRAS shifting out, this shows both an increase in output and potential output. For potential output to increase, the quality and/or quantity of the factors of production need to increase e.g. through increased immigration or supply side policies.

Sorry if this seems a bit muddled, so in answer to your first question: If LRAS shifts out: both potential and output increase. If AD increases: only real output increases and not potential

If there is an increase in economic growth without the factors of production increasing then this means that prior to the growth, on the PPF curve, the point was inside of the curve, through economic growth the point moves out until it gets to its potential (on the curve). From here the only way to achieve economic growth is through for example supply side policies which increases the potential and so the whole curve shifts out.
Basically, take the PPF curve to be the LRAS curve and so for potential output to increase, LRAS has to shift out and so if economic growth was shown by an increase in AD, this does NOT increase potential output.

Hope this helps, Im only an AS student though and so if I've got any details wrong, please tell me!
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Brian Moser
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(Original post by Johnpeters)
Yes as consumption led growth would mean that there is greater domestic demand and so more workers are needed. If there is export led growth then there is increased demand from abroad and so more workers are needed. Economic growth when shown by an increase in AD on the LRAS curve shows just an increase in national output, not potential. When economic growth is achieved through LRAS shifting out, this shows both an increase in output and potential output. For potential output to increase, the quality and/or quantity of the factors of production need to increase e.g. through increased immigration or supply side policies.

Sorry if this seems a bit muddled, so in answer to your first question: If LRAS shifts out: both potential and output increase. If AD increases: only real output increases and not potential

If there is an increase in economic growth without the factors of production increasing then this means that prior to the growth, on the PPF curve, the point was inside of the curve, through economic growth the point moves out until it gets to its potential (on the curve). From here the only way to achieve economic growth is through for example supply side policies which increases the potential and so the whole curve shifts out.
Basically, take the PPF curve to be the LRAS curve and so for potential output to increase, LRAS has to shift out and so if economic growth was shown by an increase in AD, this does NOT increase potential output.

Hope this helps, Im only an AS student though and so if I've got any details wrong, please tell me!
Thanks, but I'm still a little confused. I mean, isn't economic growth defined as an increase in the productive potential of an economy?
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Johnpeters
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(Original post by Brian Moser)
Thanks, but I'm still a little confused. I mean, isn't economic growth defined as an increase in the productive potential of an economy?
Yes, however this is an increase in the productive potential in the long term and so short term growth can be shown by an increase in AD where potential output doesn't increase, yet in the long term it would have to be shown by the supply(LRAS) shifting out.

Here's an example: If the economy wasn't at full capacity, and we get an increase in AD due to consumption rising due to lower income tax for example. Over time, if the AD continues to increase, it will eventually get to a point where the economy is at full capacity and where economic growth can no longer be achieved with current resources. For growth to now occur, LRAS must shift out and so in the long run, the productive potential has to increase for growth to continue
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tazza ma razza
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essentially if the LRAS moves out - an indicator of growth - then if the economy has a demand that is not on this new lras or near it then there is a wastage of resources eg labour. Following growth, unemployment genereally falls. eg with the uk


Excuse the mumbo jumbo if there is any
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Brian Moser
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(Original post by Johnpeters)
Yes, however this is an increase in the productive potential in the long term and so short term growth can be shown by an increase in AD where potential output doesn't increase, yet in the long term it would have to be shown by the supply(LRAS) shifting out.

Here's an example: If the economy wasn't at full capacity, and we get an increase in AD due to consumption rising due to lower income tax for example. Over time, if the AD continues to increase, it will eventually get to a point where the economy is at full capacity and where economic growth can no longer be achieved with current resources. For growth to now occur, LRAS must shift out and so in the long run, the productive potential has to increase for growth to continue
But say the productive potential of a nation increased due to something like advancements in technology or an increase in the size of the workforce. This would be represented diagrammatically as an outward shift in LRAS. However, because LRAS may move independently, SRAS and AD could remain stationary. Therefore, there had been no change in output, as this occurs at the point where SRAS=AD and neither of these curves has moved.

I'm not saying you're wrong by the way, I'm just saying that I don't understand your explanation. Thanks again for your help
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Johnpeters
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(Original post by Brian Moser)
But say the productive potential of a nation increased due to something like advancements in technology or an increase in the size of the workforce. This would be represented diagrammatically as an outward shift in LRAS. However, because LRAS may move independently, SRAS and AD could remain stationary. Therefore, there had been no change in output, as this occurs at the point where SRAS=AD and neither of these curves has moved.

I'm not saying you're wrong by the way, I'm just saying that I don't understand your explanation. Thanks again for your help
I don't think that's necessarily true? Take the Keynesian LRAS curve, the use of supply side policies shifts LRAS out yet AD remains the same. There however is a movement along the AD curve and output has increased and the price level has fallen. Even from the Classical economist approach as long as AD isn't perfectly inelastic, when LRAS shifts out, output increase. So on a Keynesian diagram, as long as the original AD is past the point where LRAS is elastic and as long as AD isn't perfectly inelastic then an increase in AD isn't always needed for output to increase.

Look at the graph called "The Keynesian view" and look at AD3 and see how output has increased when LRAS shifts out and AD stays the same http://www.s-cool.co.uk/a-level/econ...-side-policies
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Brian Moser
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(Original post by Johnpeters)
I don't think that's necessarily true? Take the Keynesian LRAS curve, the use of supply side policies shifts LRAS out yet AD remains the same. There however is a movement along the AD curve and output has increased and the price level has fallen. Even from the Classical economist approach as long as AD isn't perfectly inelastic, when LRAS shifts out, output increase. So on a Keynesian diagram, as long as the original AD is past the point where LRAS is elastic and as long as AD isn't perfectly inelastic then an increase in AD isn't always needed for output to increase.

Look at the graph called "The Keynesian view" and look at AD3 and see how output has increased when LRAS shifts out and AD stays the same http://www.s-cool.co.uk/a-level/econ...-side-policies
But the economy would operate where SRAS=AD not where LRAS=AD.

Anyway, I asked a teacher today and they said that it depends wether it's actual growth or potential/underlying growth; 'economic growth' may refer to either of these terms.

Thanks for your help though
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Johnpeters
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(Original post by Brian Moser)
But the economy would operate where SRAS=AD not where LRAS=AD.

Anyway, I asked a teacher today and they said that it depends wether it's actual growth or potential/underlying growth; 'economic growth' may refer to either of these terms.

Thanks for your help though
Fair point, didn't take that into account to be honest. No worries mate
So just to clarify, is there anything I said that was entirely wrong? Dont want to put it in the exam if it is :/
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scrotgrot
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Yes but "employment" is a terrible measure, you could abolish the minimum wage and employ people for £1 an hour and that would cause massive economic growth in itself without any increase in productivity.
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Brian Moser
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(Original post by Johnpeters)
Fair point, didn't take that into account to be honest. No worries mate
So just to clarify, is there anything I said that was entirely wrong? Dont want to put it in the exam if it is :/
Nope, I don't think so
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Johnpeters
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(Original post by Brian Moser)
Nope, I don't think so
Btw I was wondering if you could answer why real incomes increase during economic growth. I mean I understand with greater AD and AS firms can make greater profits, but surely as they are profit incentive and still provide workers with a decent wage, there is No need to increase wages?
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