Source: Images of AD created by Kate Eskra, Images of SRAS created by Kate Eskra, Images of LRAS created by Kate Eskra, Images of AD/AS model created by Kate Eskra
Hi, welcome to Macroeconomics. This is Kate. This tutorial is on sustainable economic growth. As always, my key terms are in red, and examples are in green. In this tutorial, we'll compare short term increases in GDP with long term economic growth. And we'll apply it to the idea of sustainable growth. I'll give you some examples of sustainable sources of growth. And finally, you'll recognize the difficulty in assessing public policies that discourage unsustainable sources of energy.
So why do we measure GDP? Well, we know that if real GDP rises from one year to the next, we can feel pretty confident that the economy is more productive than the year before, or growing. If GDP falls, it's an indication that the economy is slowing. And that's why we measure real GDP from year to year. Real GDP is just simply Gross Domestic Product adjusted for inflation. It shows us real growth between periods, holding price levels constant.
Economic growth is defined as the measure of the change in real GDP, then, over periods of time. It's a percentage change in the value of the sum of all goods and services produced in a country's natural borders over a specified time interval. All right. So there are many ways that an economy can produce more. But producing or consuming more does not necessarily equate to long term economic growth. So that's one thing we want you to keep in mind for this tutorial, that just producing more in economy isn't necessarily long term economic growth.
Remember, we needed to distinguish between the short run aggregate supply curve and the long run aggregate supply curve. So let's refresh our memory on that. Remember, this is the short run aggregate supply curve, which can vary in the long run with price level. In the short run, businesses can produce more as prices go up, because they won't have to pay their workers more immediately as prices are rising. And they can use up their inventories that they already have. So that's why it's possible for aggregate supply to slope upwards in the short run.
So I think I gave you this example before. You can pull an all nighter to cram for an exam or get your house ready to entertain the next day. And in that way, you can accomplish more than normal. But that level of activity is not sustainable night after night, or indefinitely. So if employers want to take advantage of higher prices in the short run, they can hire workers to work overtime. They can draw down their inventories to produce more right now. At some point, though, there's a limit the amount of resources because we have limited land, labor, and capital. So long run aggregate supply, then, is constant in the long run since resources are assumed to be used optimally, leaving no potential for increasing capacity.
So our long run aggregate supply curve is a vertical line, and it shows our economy's full potential in terms of production given today's current resources. So it's the amount of production possible when resources are fully employed and there's zero cyclical unemployment. So our production capacity is really fixed unless something changes to increase our ability to produce more.
Ramping up our production in the short run really can only get us so far. Because again, we have limited resources like materials and workers. So the amount of production that producers can sustain is fixed. That's what sustainability is all about. It's the ability to utilize resources in the current time frame without sacrificing the opportunity for future use and without disturbance to the ecosystem.
OK. So an example of this is, sure, many producers could use our resources like timber faster than those resources are being replaced. But that kind of rate of growth is unsustainable. So how, then, does our economy actually grow over time and not just simply produce more in the short run? Well, we have to figure out a way for our long run aggregate supply curve to move. And it is possible.
One way is if we just find more land, labor or capital through maybe population changes. If there's a greater number of people in the workforce, then that presents more resources in terms of labor. If we discover new resources, that could also be a way. But another way is to find more efficient production techniques that allow us to produce more given the resources that we already have. And that's where advancements in technology are huge.
Improvements in technology shift out our long run aggregate supply curve, and they give us the ability to produce more into the long run. So let's look at sustainable versus unsustainable economic growth. A sustainable form of economic growth-- I came up with the use of computers. Because I know in my lifetime, I didn't grow up as a child with computers. The high school students that I teach today, they've always had them around. And I just think it's an interesting thing to look at in terms of our economy. Because today, businesses can hire the same, if not fewer, workers to accomplish much more in a lot less time due to the use of computers doing various things. That shifted our long run aggregate supply curve.
An unsustainable example of just simply producing more in the short term are things like tax breaks or stimulus programs that do, in fact, maybe they help us get out of a recession, but they're not going to long term cause economic growth. These expansionary policies temporarily encourage more consuming or more producing, but what they do is they shift aggregates in the end, or the short run aggregate supply curve. And they do nothing to impact our long run potential or our long run aggregate supply.
But if we're in a recession, that's what this graph, remember, shows. These policies actually might be sustainable, because we're not at our full potential. So they can encourage the use of currently unutilized resources and get us to this point. And they can help the economy get to full employment. Unfortunately, economists debate on the exact location of the long run aggregate supply curve though.
So if we were already here, and we tried to continue to stimulate aggregate demand through expansionary policies, anytime we push the short run equilibrium beyond that long run potential output, it's just going to cause prices to go up, and then aggregate supply will shift to the left again. That's why the long run aggregate supply curve is where it is, because it represents our potential today given the resources that we have.
So if we're already here, enacting those policies are not going to cause long term economic growth that is sustainable. So it will merely increase output in the short term. So we have difficult decisions. The example here of non-renewable sources of energy really illustrates why there's so much debate. And in all honesty, there is no easy answer.
So we know that coal and oil are technically considered nonrenewable. So why do we use them if they're not renewable? Well the economic answer is that the opportunity cost today of using them is lower than adopting new methods. That's why we use them. But we know that that's not always going to be the case. There will eventually come a time when it's actually more expensive to find what's left than what we actually get out of it.
So for example, at some point, it will use more energy to find the remaining coal underneath the earth's surface than the energy we would actually get out of it. If we're talking about oil, it will get to the point where it will cost more to extract the oil because it's so far beneath the earth's surface, or we have to find new sources of it. And it could get more and more and more costly to extract that oil than what we get from the well.
So some argue that we should stop relying on these unsustainable energy sources, knowing that eventually we're going to need to change. The problem is switching now would still be more expensive and would cause prices to rise. So it would probably be good for future generations, for our children, to do this sooner rather than later. But it would be bad for older individuals today, who are living on fixed incomes and who won't be around in the future.
So it's impossible to say absolutely what is right, because the costs and benefits vary for different groups of people or for different stakeholders. We can, though, look at these costs and these benefits and have discussions about various policies. The big idea is that when voters are informed, if voters understand that these decisions are difficult but we can look at the costs and benefits of them, then we will have more efficient outcomes through our democratic process.
So in this tutorial, we talked about short term increases in GDP and how they're different from long term economic growth. Growth is only sustainable when it shifts our long run aggregate supply curve. We talked about sustainable sources of growth, and that included changes in technology, population growth, or finding new resources. And finally, we ended with a discussion about how it's really difficult to assess these public policies with this unsustainable source of energy, because the costs and benefits are different for various stakeholders.
Thank you so much for listening. Have a great day.
Measure of the change in real GDP over periods of time; percent change in value of the sum of goods and services produced in a country’s natural borders over a specified time interval.
Long-run aggregate supply is assumed to be constant in the long-run as in the long-run resources are assumed to be used optimally, leaving no potential for increasing capacity. LRAS is a vertical curve.
Gross domestic product adjusted for inflation— shows real growth between periods holding price level constant (also known as RGDP).
The ability to utilize resources in the current timeframe without sacrificing the opportunity for future use and without disturbance to the ecosystem.