Economic Growth

1
Economic Growth

• Economic Growth, in general, means increase in
  economic (material) well being of average
  citizen.

2
Economic Growth

• Economic Growth, in general, means increase in
  economic (material) well being of average
  citizen. It is measured as the rate of change in
  the real per capita income (real GDP).

3
Economic Growth

• Economic Growth, in general, means increase in
  economic (material) well being of average
  citizen. It is measured as the rate of change in
  the per capita income (GDP). That is to say, if
  a nations output of goods and services outpace
  population growth, average real per capita income
  will increase and therefore, average individual
  will be materially better off than before.

4
Economic Growth

• Measuring economic growth is problematic because
• data problem (collection frequencies, accuracy)

5
Economic Growth

• Measuring economic growth is problematic because
• data problem (collection frequencies, accuracy)
• distribution of the GDP

6
Economic Growth

• Measuring economic growth is problematic because
• data problem (collection frequencies, accuracy)
• distribution of the GDP
• better living standard? (work v. leisure)

7
Economic Growth

• Measuring economic growth is problematic because
• data problem (collection frequencies, accuracy)
• distribution of the GDP
• better living standard? (work v. leisure)
• Quality improvement

8
Short v. Long Run

• Short run is defined as a period short enough
  that labor is the only factor that could be
  increased to raise output.

y
Yf(N)
N
9
Short v. Long Run

• Long run is defined as a period long enough that
  we can change the capacity of production. In this
  case, K and L as productivity become determining
  factors in economic growth.

y
Yf(N, K) A
N
10
Determinants of Growth

• Economic growth could result from
• increase in supply of labor

11
Determinants of Growth

• Economic growth could result from
• increase in supply of labor
• population growth

12
Determinants of Growth

• Economic growth could result from
• increase in supply of labor
• population growth
• immigration

13
Determinants of Growth

• Economic growth could result from
• increase in supply of labor
• population growth
• immigration
• increase in capital stock

14
Determinants of Growth

• Economic growth could result from
• increase in supply of labor
• population growth
• immigration
• increase in capital stock
• increase in productivity

15
Increase in Supply of labor
y
y
F(N)
y
N
W
y
N
16
Increase in Supply of labor
y
y
F(N)
y
N
W
y
N
17
Increase in Supply of labor
y
y
F(N)
y
N
W
y
N
18
Increase in labor productivity
y
y
F(N)
y
N
W
y
N
19
Increase in labor productivity
F(N)
y
y
F(N)
y
N
W
y
N
20
Increase in labor productivity
y
F(N)
y
F(N)
y
y
y
N
W
W
W
y
N
N
N
y
y
21
Capital and Investment

• Capital is the total quantity of plant,
  equipment, buildings, and inventories.
• Gross investment is the purchase of new
  capital.

22
Capital and Investment

• Depreciation is the wearing out and scrapping
  of existing capital.
• Net investment is gross investment minus
  depreciation.

23
Capital and Investment

• Private investment is business investment plus
  investment in new homes and addition to
  inventories.
• Government investment is the part of
  government purchases that creates social
  infrastructure capital.

24
Investment and the Capital Stock 19701998
25
Investment and the Capital Stock 19701998
26
Investment in the United Statesand World
19701998
27
Investment Decisions

• Business investment decisions are influenced
  by
• 1) The expected profit rate
• 2) The real interest rate

28
Investment Decisions

• The Expected Profit Rate
• The greater the expected profit rate from new
  capital, the greater is the amount of investment.

29
Investment Decisions

• The Expected Profit Rate
• Three Major Factors Affecting the Expected
  Profit Rate
• 1) The phase of the business cycle affect
  expected rates of profits In recessions sales
  and profits fall while during expansions sales
  and profits rise. Therefore, during recessions
  (expansions) investment demand falls (rises)
• 2) Advances in technology
• 3) Taxes

30
The Real Interest Rate
31
Investment Decisions

• The Real Interest Rate
• The opportunity cost of funds is the real
  interest rate.

32
Investment Decisions

• The Real Interest Rate
• The opportunity cost of funds is the real
  interest rate
• The lower the real interest rate, the greater is
  the amount of investment..

33
Investment Decisions

• The Real Interest Rate
• The lower the real interest rate, the greater is
  the amount of investment.
• The opportunity cost of funds is the real
  interest rate.
• If the real interest rate exceeds the expected
  profit rate, firms should not invest in new
  capital since they could earn more by loaning the
  funds to other firms.

34
Investment Decisions

• Investment Demand
• Illustrates the relationship between investment
  and the real interest rate.

35
Investment Demand
12
10
8
Real interest rate (percent per year)
6
4
2
0
0.6
1.0
1.2
1.4
1.6
0.8
Investment (trillions of 1992 dollars)
36
Investment Demand
12
10
Real interest rate (percent per year)
8
6
4
2
0
0.6
0.8
1.0
1.2
1.4
1.6
Investment (trillions of 1992 dollars)
37
Investment Demandin the United States
Recession of 1991
Expansion of 1990s
38
Saving Decisions

• National Saving
• The sum of private saving and government saving.

39
Saving Decisions

• The main factors affecting household saving
  are
• The real interest rate
• The lower the real interest rate, the smaller is
  the amount of saving and the greater is the
  amount of consumption.

40
Saving Decisions

• The main factors affecting household saving
  are
• The real interest rate
• The lower the real interest rate, the smaller is
  the amount of saving and the greater is the
  amount of consumption.
• Disposable income
• The greater a household's disposable income the
  greater is its saving.

41
Saving Decisions

• The main factors affecting household saving
  are
• The real interest rate
• The lower the real interest rate, the smaller is
  the amount of saving and the greater is the
  amount of consumption.
• Disposable income
• The greater a household's disposable income the
  greater is its saving.
• Purchasing power of net assets
• The greater the purchasing power of a households
  net assets the less is its saving.
• Net assets are assets minus debts

42
Saving Decisions

• The main factors affecting household saving
  are
• The real interest rate
• The lower the real interest rate, the smaller is
  the amount of saving and the greater is the
  amount of consumption.
• Disposable income
• The greater a household's disposable income the
  greater is its saving.
• Purchasing power of net assets
• The greater the purchasing power of a households
  net assets the less is its saving.
• Net assets are assets minus debts
• Expected future income
• The lower a households expected future income
  the greater is its saving.

43
Saving Decisions

• Saving Supply
• Illustrates the relationship between saving and
  the real interest rate

44
Saving Supply
12
10
8
Real interest rate (percent per year)
6
4
2
0
0.8
0.9
1.0
1.1
1.2
1.3
Saving (trillions of 1992 dollars)
45
Saving Supply
12
SS0
10
8
Real interest rate (percent per year)
6
4
2
0
0.8
0.9
1.0
1.1
1.2
1.3
Saving (trillions of 1992 dollars)
46
Saving Supply in theUnited States 19701998
47
Saving and Investment inthe National Economy

• Saving supply and investment demand in the world
  economy determine the world real interest rate.
• Saving does not necessarily equal investment in a
  national economy.

48
Saving and Investment inthe National Economy

• National investment is financed by national
  saving plus borrowing from the rest of the world.
• For the world as a whole, international borrowing
  equals international lending.

49
Saving and Investment inthe National Economy

• Each nation contributes to world saving and
  investment and so influences the world real
  interest rate.
• A nations saving and investment decisions, along
  with the world real interest rate, determine the
  amount the nation borrows from or lends to the
  rest of the world.

50
Saving, Investment, andInternational Borrowing
12
SS
10
8
Real interest rate (percent per year)
6
4
ID
2
0
0.5
1.0
1.5
2.0
Investment and saving (trillions of 1992 dollars)