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Economic Growth and Development
Growth and Development policies
Economic growth = economy produces more output more efficiently than it did before
using more inputs.
Economic development = improvement in quality of life so that people have more g/s
and greater security which makes life easier/more comfortable
Eco G/D are closely linked development can’t take place without growth
However if growth occurs it doesn’t mean development will occur – the state must
intervene to make sure that both happen using polices.
Growth Policies aim to increase output of g/s so real GDP increases – therefore policies
that improve quantity and quality of FoPs
Development polices aim to improve conditions under which people live so that the
population can increase income – shown by an increase in UN Human Development
Index (HDI) and increase in real per capita GDP
Eco G = increased production
Eco D = improved living standard
G & D policies must work together so improvements can be sustained
If this happens the population will be better educated/skilled & healthy therefore they’ll
be more productive
As economy produces more, people receive more and Eco D increases
Two main instruments to stimulate G & D are taxes and gov. spending
Factors influencing developmental polices
3 factors influence gov. policies
1. State of Gov. Finances – a key factor of successful development is amount of Gov.
Revenue available for creating basic services for all.
2. Politics – political decisions are made about which G & D polices to adopt
3. Resources – must have allocative efficiency with what resources a country has
Factors that promote G & D
Growth refers to increase in production so that GDP increases – growth is achieved by:
Availability of quality/quantity of resources
Greater productivity of labour
Efficient infrastructure
Greater use of technology
New business investment
Increasing entrepreneurship
Democratic, efficient and free of corruption gov.
Development refers to an increase in standard of living and is achieved by:
Government policies to reduce poverty
Enough gov. finances to cover welfare payments
Well-administered welfare system
Reducing unemployment rate
Improving education
Improving housing
Inspiring people to improve own standard of living
Benchmarks and international best practices
UN, World Bank and IMF set standards for suitable polices known as benchmarks
A benchmark is a standard at which something can be measured
Countries should not deal with countries who fall short of these benchmarks
Benchmarking is also known as International Best Practice
International Best Practice is a set of guidelines that represent the most efficient
socially accepted course to take
, The Demand-Side approach to growth and development
Demand-side is a policy that focuses on the aggregate demand by consumers and how
to use this demand to grow the economy
When aggregate-D increases it stimulates business to increase output which leads to
increased employment and improved living standard
D-side economics uses fiscal and monetary policy to increase aggregate-D
Fiscal policy is tax & gov. spending
Monetary Policy is money supply &
Changing demand using fiscal policy
Fiscal policy is the main method of influencing demand in the economy as to stimulate
or control Econ G & D
It’s achieved by changing level of taxation and expenditure by the state
The budgeted deficit must not be too large
The international benchmark for a budget deficit is 3% of GDP
Fiscal Policy can improve development in the following ways:
Welfare grants – helps reduce poverty
Progressive Tax system – reduce income inequality
Reducing taxes – stimulates consumer spending
Land ownership – fairness in land distribution
Stimulates employment – people have more income
Fiscal Policy can improve growth by financing the following:
Infrastructure – creating efficient transport ,communication and power
New business – financial support and advice to new business
Increase foreign trade – increase export promotion
Training – establish training schemes
Changing demand using monetary policy
Reserve Bank uses changes in interest rate to influence Econ G & D
Monetary policy aims to change aggregate demand by increasing/reducing the rate of
interest
There are 4 Monetary Policy instruments:
1. Open market transactions: are direct actions taken by the central bank to carry
out monetary policy objectives.
o To carry out open market transactions the central bank buys and sells
government securities (bonds).
o When central bank buys bonds, money flows from central to commercial
banks, therefor they have more money available to lend.
o When central bank sells bonds , the commercial banks have less money
available to lend
o The process of buying/selling bonds by central bank is a way of changing
the money supply
2. Cash Reserve Requirement: is the minimum percentage of total deposits that the
bank has to keep as cash and may not be used for lending or investing
o A change in cash reserve makes more or less money available. The cash
reserve ratio in SA is 5%
3. Exchange Control Policy: measures taken to prevent capital assets from being
transferred to other countries
o Usually established in developing countries when the central bank fears
large amounts of foreign currency will be removed from the country
4. Moral persuasion
o Central bank consults commercial banks and they follow the lead of the
central bank
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