Student Notes 9:

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Rose-Hulman Institute of Technology Department of
Humanities Social Sciences / K. Christ SL 151,
Principles of Economics
Student Notes 9 Economic Growth
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Long-Term Economic Growth
What factors affect the long-term trend rate of
growth?
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The classical view of economic growth (the
long-run)

• Productivity and long-run economic growth In
  the long run, the amount of output which an
  economy can produce is a function of its
  resources, its technology, and its productivity.
• The classical dichotomy
  In the long run, the amount of money
  circulating in an economy affects only the price
  level and does not affect the real determinants
  of economic growth.

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Productivity and long-run economic growth
q q q q q
Labor Physical capital Human capital Natural
resources Technology
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Productivity and long-run economic growth
Influential Factors
Labor Physical capital Human capital Natural
resources Technology
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Tradeoffs and growth
C o n s u m t i o n T o m o r r o w
B
A
C o n s u m p t i o n T o d a y
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Savings, investment, capital formation and
long-term growth
where d is known as a depreciation rate.
financed by (1) savings (2) borrowing
from abroad
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The Market for Loanable Funds
Investment requires funds, which are generated by
foregoing consumption in the present (saving).
The equilibrium interest rate is that price of
funds that equates the supply of and demand for
funds. This process of financial intermediation
occurs in many different financial markets. The
entire process is sometimes summarized as the
market for loanable funds.
i
S, Supply of Funds - Private Saving
- Public Saving
i
I , Investment Demands
S, I (loanable funds)
S I
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Opportunity Cost and the Concept of Crowding Out
The opportunity cost of government deficit
spending is the reduction in private-sector
investment that occurs as a result of the deficit.
How would this work?
Govt. Deficit shifts supply of loanable funds
Govt. borrowing pushes up interest rates
Private investment declines in response to higher
borrowing costs
i
S
S
I
S, I (loanable funds)
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(Heritage Foundation)