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Study Notes

Economic Growth - Advanced Nations

AS, A-Level
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Developed countries include all 28 members of the European Union (including newly acceded members that are regarded as "transition economies"), other non-EU western European countries and territories (including Switzerland, Norway, Iceland, etc.) The group also includes the United States, Canada, Japan, Australia, New Zealand and South Korea – now a member of the OECD (which is the group of leading advanced economies

Some drivers of economic growth

Why is economic growth so weak in many advanced countries?

  • Secular stagnation theory
    • Some economists argue that developed countries are experiencing a sustained period of slower trend GDP growth caused by
    • Weaker productivity growth
    • A dip in the pace of innovation in markets
    • The effects of an ageing population / rising dependency ratio
  • Global shifts in investment and production to emerging nations
  • The debilitating effects of the global financial crisis including a shrinking of finance available for business investment
  • Persistently high unemployment in many advanced countries
  • The negative effects of fiscal austerity policies especially in the EU/UK
  • Damaging effects of deflation in countries such as Japan
  • Weaker growth has brought about stagnant or declining real incomes
  • Growth in developed countries may have been hit the the effects of rising inequalities of income and wealth

Economic recession and weak growth in the Euro Area

What factors have contributed to persistent recession in the Euro Area?

  1. Continued fall out from the global financial crisis
    • Contractions in bank lending, many banks required bailouts / nationalization
    • Sharp falls in real output and investment in industries such as construction
    • Large declines in business confidence and investment
    • Decline in property prices – asset price deflation
  2. Labour market failures
    • High rates of structural unemployment and economic inactivity
    • Low employment rates in many EU countries especially in southern Europe
    • Low levels of labour mobility compared to the United States
  3. High exchange rate
    • The Euro (a floating currency) has remained fairly strong against the US dollar and other currencies despite the economic crisis (perhaps overvalued?)
    • Fiscal crisis and resulting fiscal austerity programmes
  4. Increase in relative poverty – causing steep declines in consumption
  5. Policy inertia on behalf of the European Central Bank
    • Reluctance to move beyond low interest rates
    • Programme of quantitative easing only introduced in January 2015

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