Economic Growth

1
Economic Growth

• Chapter 10

2
Basics of Economic Growth

• How to calculate growth rate
• Growth rate of real GDP (real GDP in current
  year real GDP in previous yea) / real GDP in
  previous year 100
• Growth rate of real GDP per capita growth rate
  of real GDP growth rate of population
• Rule of 70
• The number of years it takes for the level of any
  variable to double is approximately 70 divided by
  the annual growth rate of the variable

3
Sources of Economic Growth

• Sources
• Increase in labor (aggregate hours)
• Physical capital growth
• Human capital growth
• Technology advance
• The last three sources contribute to economic
  growth through labor productivity
• Labor productivity real GDP / aggregate hours

4
Sources of Economic GrowthContinued

• Productivity curve
• Relationship between labor productivity (real GDP
  per hour of labor) and the amount of physical per
  hour of labor
• Movement along the productivity curve is caused
  by changes in capital per hour of labor.
• One third rule 1 capital increase ? 1/3 labor
  productivity
• Shift of the productivity curve is caused by
  changes in human capital and technological
  advance.
• Why lower labor productivity growth in the 1970s?

5
Theories of Economic Growth

• Classical growth theory
• A pessimistic view that an exploding population
  and limited resources will eventually bring
  economic growth to an end.
• Also called Malthusian theory
• Process
• Initially economic growth from subsistence level
  with more capital and technology advance ?
  population growth and no more resources push the
  economy back to the subsistence level
• Background population explosion of 18th c. Europe

6
Theories of Economic GrowthContinued

• Neoclassical growth theory
• Population growth and technology advance will
  affect economic growth, but as long as technology
  keeps advancing, the economy will grow.
• Technology advance is exogenous (a result of
  chance).
• Background no more population explosion in the
  19th and 20th c.
• Shortcoming no explanation of how technology
  advances.

7
Theories of Economic GrowthContinued

• New growth theory
• Our unlimited wants will lead us to ever greater
  productivity and perpetual economic growth.
• Our choices and preference for better living and
  profits lead us new discoveries and accumulation
  of human capital.
• Competition squeeze profits ? seeking new
  discoveries
• Continuous shift up of the productivity curve

8
Preconditions for Economic Growth

• Preconditions Economic freedom
• Freedom of individuals and businesses from
  government restraints on economic activities
• Legal and institutional frameworks to safeguard
  economic freedom (such as property rights and
  contract laws)
• Visit www.heritage.org for ranking of individual
  countries.

9
Policies to Achieve Economic Growth

• Create the incentive mechanisms
• Promote competition
• Promote international trade
• Encourage saving
• Encourage investment, particularly R D.
• Improve quality of education and training