MAcro CHAPTER 5.7:

CHAPTER SUMMARY

Economic growth tends to happen naturally as a result of the invisible hand. In order to increase economic growth, though, governments must pursue policies that help achieve one of the methods of economic growth discussed last chapter:

• An advance in technology

• Accumulation (an increase in the amount) of physical capital (tools & equipment)

• Accumulation of human capital (worker skills and knowledge)

In general, economic growth policies should either:

• Spur innovation (such as patent law, which protects innovation and encourages technological development)

• Increase infrastructure spending (such as building better subway systems or high speed WiFi)

• Increase education investment (such as making university cheaper)

Governments have multiple approaches to this called Demand-Side Economics and Supply-Side Economics.

Demand-Side Economics focuses on trying to increase aggregate demand through fiscal stimulus, encouraging spending and investment. However, a downside of this is that this often raises interest rates (due to crowding out) and price levels (as a result in a rightward shift of AD), both of which limit the effects of the policy. One positive of demand-side economics, especially stimulus payments (simply giving money to people), is that it allows people to decide what the economy needs to produce more of, rather than the government deciding.

Supply-Side Economics focuses on trying to increase aggregate supply instead of aggregate demand. Doing so can increase GDP while also lowering price levels. Governments sometimes do this by giving tax credits (reductions in tax) to certain types of businesses, or even all types of businesses, to lower their production costs. One problem with this is that governments aren't always good at picking out what types of businesses should get these benefits. If they lower taxes on all businesses, that benefit also goes to oil companies, who might start polluting more. If they select certain types of businesses to lower taxes for, people may complain that it is unfair.

This is ultimately a normative question, so you are not expected to know which is better. Economists disagree about this. We just want to be familiar with the arguments on each side.

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