What this lesson teaches
I can explain the causes of weak growth, unemployment, and inflation or deflation.
Syllabus 8843, 3.2.2(a). Macroeconomic Issues: Macroeconomic issues and their causes; Undesirable economic growth - persistently low or negative, unsustainable, non-inclusive due to factors such as changes in AD or AS, environmental degradation, inequitable income distribution; Unemployment - demand-deficient, structural, frictional due to factors such as lack of AD, technological changes, mismatch of skills, transition between jobs; Price instability - demand-pull inflation, cost-push inflation, deflation due to factors such as changes in AD, costs of production, productive capacity
Make a guess
A factory cuts emissions per unit by 20% but raises output by 50%. Did its total emissions fall?
- No. Total emissions rose, because output grew faster.
- No. Emissions stayed the same, because the two changes cancel out.
- Yes, because cleaner equipment lowers pollution overall.
Show the answer
No. Total emissions rose, because output grew faster.
Before: 100 units x 0.10 = 10. After: 150 units x 0.08 = 12. Cleaner units do not help if output grows faster.
Growth is sustainable if it can continue without running down the environment and resources future generations need.
Growth that depends on heavy pollution or using up natural resources may not last. It can harm health, reduce productivity and leave less for the future.
Growth is also unsustainable if AD grows much faster than capacity. This is overheating: actual growth running ahead of potential growth. Firms run machines and staff beyond normal hours, so output is pushed close to, or briefly past, the level the economy can sustain.
Shortages of workers and materials then push up wages and prices, so inflation rises. A sharp slowdown often follows, when the central bank tightens policy or spending falls back. The diagram below shows how the same rise in AD raises prices far more near full employment.
Cleaner technology helps, but total output matters too. If production grows faster than emissions per unit fall, total emissions still rise.
Singapore's Green Plan 2030 and carbon tax aim to make growth more environmentally sustainable.
- Sustainable
- Does not run down resources or the environment.
- Check
- Total emissions, not just emissions per unit.
- Overheating
- AD grows faster than capacity: shortages, rising wages and prices, then often a sharp slowdown.
Worked example: Cleaner per unit, more in total
A factory makes 100 units with emissions of 0.10 per unit. After new equipment, emissions fall to 0.08 per unit, but output rises to 150 units.
- Before: 100 x 0.10 = 10 units of emissions.
- After: 150 x 0.08 = 12 units of emissions.
- Each unit is cleaner, but total emissions rose.
- Whether growth is sustainable depends on the total, not the rate per unit.
Watch out for this
Cleaner production per unit proves growth is sustainable.
If output grows fast enough, total pollution can still rise.
Check your understanding
Which is the best sign of environmentally sustainable growth?
- Emissions per unit fall slightly while output doubles.
- Real output rises while total emissions fall.
- Real GDP grows faster than ever.
Show the answer
Real output rises while total emissions fall.
Right. The economy grows without adding to environmental harm.