ECONOMIC GROWTH

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ECONOMIC GROWTH
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The Situation

• Robinson Crusoe is on a desert island.
• The island has some goats which will let him milk
  them.
• The island has good fishing.
• RC can divide all the hours he works between
  fishing and milking goats.

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Production Possibilities
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Production Possibilities
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Capital and production

• Capital are goods produced in the past which are
  used to produce other goods.
• RCs stock of capital is limited to
• a sharpened stick for fishing.
• a bucket he found on the beach to hold the milk.
  

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Economic Growth

• RC could produce more if he worked longer hours,
  but he is exhausted after chasing goats around
  the mountain and standing by pools with his stick
  trying to stab fish.
• If he had more capital, say fencing for the goats
  or a net to catch fish, he could produce more
  without working so hard.

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Capital Accumulation

• RC could weave a net out of the bark of a tough
  tree that grows on the island.
• If he has a net, he could greatly increase his
  fish production.

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Production with a fish net
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Shift in production possibilities
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Capital Accumulation

• But RC has to make the nets before he can catch
  fish with them.
• If he is to gather bark and weave nets, he will
  have less time to chase goats and to fish.
• He must shift resources out of production for
  current consumption and into production for
  future consumption.

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Producing Capital

• RC now has a new set of possibilities he can
  weave nets.
• If he produces no fish, these are his trade-offs.

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Cost of Growth

• Cost of Capital Accumulation
• Resources must be diverted from fishing and
  milking goats to making nets
• Current Consumption must be reduced to produce
  the capital goods which will increase future
  consumption.

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SUMMARY

• Output can increase the ppb boundary can shift
  out only if a society reduces current
  consumption
• We call a reduction in current consumption
  SAVING.
• How hard it is for RC to save depends partly on
  how hungry he is, and how hard he works to feed
  himself now.

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Technological Change

• What about fencing goats?
• To fence the goats, RC must cut down trees. He
  doesnt have a tool to cut trees.
• He suspects could make an axe from the right kind
  of stone, or perhaps sharpened shells on the
  beach.
• He needs to spend time to learn how to make an
  axe.

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Technological Change

• We could look at a PPB for research and
  development of an axe and other productive
  activities but you probably get the picture.
• Technological change results in large part from
  time and effort spend learning better production
  methods.

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GROWTH

• Economic growth requires a reduction of
  consumption in the present as resources are
  shifted into producing capital goods or improving
  technology. In the future, we can have more of
  both consumption and capital goods.

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GROWTH

• If in Year One you produce 500 capital and 500
  consumer goods in year two the PURPLE line will
  be the ppf Year Two.
• If in year one you produce 1100 capital and 300
  consumer goods in year two the RED line will be
  the ppf Year Two.

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Economic Growth

• Through time, societies grow partly by
  accumulating capital. With more capital
  equipment (machines, newly discovered resources,
  educated human beings) we can expand production.
• If resources are devoted to RD we can learn
  better ways of making goods, and also expand
  production. Coal electric plants can be replaced
  with wind mills.