Notes on Economic growth: "Is it Desirable?"
Economic growth means a more able economy, due to a greater potential output. How the economy chooses to use that extra potential output affects other international economies; if the economy is an "Open economy" the effect is greater.
An "Open economy" such as the United Kingdom is one that Exports and/or Imports its goods; the UK survives on being an open economy. An Open economy is highly Integrated with the global economy. For this reason such an economy is influential to other countries' economic behaviour.
A "Closed economy" such as North Korea, whom only trade with China as of late, has tight or no trade between other nations.
The effect within the macro-economy of growth.
^ above shows the effect of Economic development; The shift In Long Run Aggregate Supply means more potential for a country to output goods and services, wither to themselves or to other economies through trade.
With all else the same, the outward shift in LRAS causes a deflationary pressure, causing Inflation to decrease from PL1 to PL2. The increase in available supply of goods and services means an extension in Aggregate Demand; Consumers are encouraged to spend more and save less by the market changes since the price of goods are cheaper and they can buy more with their incomes.
This case of fall in inflation is considered good for the most part, since it is a fall in price level due to more available short run supply ad potential supply in the long run. Because there is greater potential to supply a good, this means opportunity for more vacant jobs, this is shown by the increase in potential full employment from YF1 on LRAS1 to YF2 on LRAS2. The obvious drawback is the possible increased pressure on suppliers/producers.
This type of deflationary pressure is known as Benign Deflation, meaning "nice Deflation".
Economic Growth and effect on Open economy countries
on the Exporter
In the case of a competing Exporter, if the price of their goods and services in their economy fall in price, they will likely experience a heavier demand for those goods by outside nations, since they want to import for a cheaper price.
This can be good for the exporter country in the short run, Since they accumulate more money into the flow of national income, known as an Injection.
In the long run however, the influx of demand cannot be continually sustained, and suppliers experience pressure, in this case there exists a positive output gap due to an overshoot in demand, where aggregate demand is greater than what the economy can supply in the long run (LRAS). this is caused by the Multiplier effect.
at this point, consumers are draining the scarce good. World oil prices were stable at $110 a barrel from 2010, in June 2014 this dropped by more than a half to below $50 a barrel. "Brent Crude" oil prices fell to less than $50 a barrel, "US crude" fell to less than $48 a barrel, this was cause by what was described as "Surging US Production" (i.e. economic growth)
^ chart of oil prices for Brent Crude oil, $/barrel
whilst this was happening, the oil Consortium OPEC were not planning on cutting production. essentially what this meant was that global supply for oil became, for a short while, elastic. As a result, consumers could exploit the low prices and fill their tanks of their petrol cars while the prices for United States oil were still cheap, and supply would be fed continuously by the oil Cartel.
On the Competitors
what this meant for competing oil supplying countries like Russia, whose oil prices did not fall at the time, was that they lost a majority of their energy revenues. Oil and gas account for 70% of Russia's export Incomes, much of this was lost when consumers went to cheaper Western prices. Because consumers had a more economical choice, Price elasticity of Demand for Russian Oil was elastic, so they could not cut off supply to bump up the price to compensate for loss of revenue. Russia also saw its interest rate shoot up to 17% as a result.
"If we cut, the importer countries will increase their production and this will mean a loss of our niche market," said Energy Minister Alexander Novak.
Russia became left without options but to hope for US prices to cease falling, and for every $1 US oil fell, they lost about $2bn in revenue. World bank warned that if prices did not recover, Russia could face an economic shrinkage by 0.7% in 2015.
in short, Economic growth is beneficial in the short run, since, it is generally a sign of prosperity and willing spenders which are key, it reduces unemployment and increases a currency's spending power. However, the influence it can have on demand by consumers can be potent because of the multiplier effect, and, in the long run, be harmful to both the an open exporter and their competitor. If not regulated, goods are quickly drained, producers buckle under high pressure leading to economic uncertainty, businesses' confidence become on edge. A monetary policy may be enforced to tackle this, namely, increasing the interest rate will encourage consumers to spend less excessively and save more, as they get greater reward.
as seen by the case of Russia, Economic growth outside it own country can diminish its own revenues for the same good or service, and have knock on effects. simply because they are an Open economy they cannot avoid it. a closed economy would be safe because they do not allow trade to pass as easily, so consumers have little choice but the nations own supply.