Download Economic Growth

Economic Growth
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Factors of Economic Growth
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Indicators of Economic Growth
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Neokeynesian Growth Models
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Neoclassical Growth Models
Economic Growth
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Economic growth represents the
expansion of country's output.
Over the long term, increases in real
GDP demonstrate an upward trend,
which economists call long-term
economic growth.
Indicators of Economic Growth
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Coefficient of economic growth:
Qt
r
100% 
Qt 1
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Economic growth rate:
Qt  Qt 1
G
100% 
Qt 1
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Absolute change in total output:
Qt - Q t-1
Business Cycle
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In short term, there are economic
fluctuations – increases or decreases in
real output. This short-term fluctuations
in real output are also called business
cycles. Sometimes real output
fluctuates above the trend line and
sometimes it fluctuates below the trend
line.
Economic Growth
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In the short run, an economy with
Keynesian unemployment and spare
resources can increase output by increasing
aggregate demand and employment.
If potential output is constant, the economy
will quickly reach potential output and further
growth will cease.
In the long run, only changes in the level of
potential output can explain economic
growth.
The Causes of Economic Growth
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An increase in the quantity of factors of
production – extensive economic growth
An increase in the productivity of factors of
production – intensive economic growth
Factors Responsible for
Economic Growth
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Capital
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Labour
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Land
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Technical knowledge
Capital accumulation
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Capital (the stock of machinery, buildings,
and inventories) with other factors of
production produces output.
An increase in the quantity of capital per
worker will generally increase output.
Labour
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Labour inputs depends on the hours worked
as well as the number of people working.
By increasing the labour input obtained from
a given population, this tends to increase
total output.
Human capital is the skill and knowledge
embodied in the minds and hands of the
population. Increasing education, training
and experience allows workers to produce
more output from the same level of physical
capital.
Land
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Land is especially important in an agricultural
economy. Increases in the supply of land and
natural resources are relatively unimportant
as a source of growth in modern economies.
Technical knowledge
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Technical advances come through:
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Invention, the discovery of new knowledge
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Innovation, the incorporation of new knowledge
into actual production techniques.
Technological innovation
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Technological innovation – technological
change denotes changes in the process of
production or introduction of new products
such that more or improved output can be
obtained from the same bundle of inputs.
Technological changes shift out the
production-possibility frontier.
Technological progress increases the
productivity of factors of production.
Production Possibility Frontier
Consumption goods
C
B
A
An economy grows by giving
up some current consumption
and producing capital goods
for the future instead.
The more capital is produced,
the faster will its production
possibility frontier shift
outward over time.
Capital goods
Neokeynesian Growth Models
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Domar growth model - based on the
multiplier effect
Harrod growth model – based on the
accelerator principle
Domar Growth Model
Keynesian growth model results from general
equilibrium AD = AS and I. In Domar model
investments are autonomous.
● Annual change in production capacity
(PC) denotes change in AS:
ΔAS = I . b
b: average investment productivity
● Income (Y) growth represents change in
AD:
ΔAD =ΔI . α
α = 1/s investment multiplier
s = marginal propensity to save
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Domar Equation
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Domar equation:
ΔAD = ΔAS
ΔI . α = I . b
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Investment growth rate:
ΔI/I = b /α
ΔI/I = b . s
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Investment should growth by number which
equals b . s
Harrod Growth Model
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Assumptions:
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The saving growth rate equals income growth
rate: s = S / Y
S= s . Y
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A change in investment (induced) is due to
change in income and the accelerator principle:
a = I /ΔY (a: accelerator)
I = a . ΔY
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Equilibrium I and S
I=S
Harrod Growth Model
I=S
a . ΔY = s . Y
ΔY / Y = s / a
Income growth rate:
G=s/a
Domar-Harrod model: s . b = s / a
Neoclassical Growth Models
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The neoclassical growth models are using
production functions focussing on the two
inputs: labour and capital.
The production function tells how much
production of goods and services can be
obtained from a certain amount of labour and
capital.
Complementary Production
Function
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Assumption: the factors of production (labour
and capital) are complements in this model.
The capital – labour ratio is constant in
complementary production models.
Q=L.ω
ω: coefficient of average labour
productivity
Q = K . β β: coefficient of average capital
efficiency
L.ω=K.β
Complementary Production
Function
If L . ω > K . β then there will be capital
inefficiency (certain quantity of capital
goods is unused).
If L . ω < K . β then there will be
unemployment (unused labour forces).
Substitutional Production
Function
Substitutional production function focuses
on the role of capital and labour in the growth
process.
● The most famous substitutional production
function is Cobb – Douglas production
function:
Q = A . La . Kb
The exponents a, b, denote elasticity. Elasticity
measures the responsiveness of output to a
change in levels of either labor or capital
used in production.
A: coefficient of total productivity
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Economic Growth and
Government Policy
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Supply-side economics – the purpose of
supply-side economics is largely to achieve
an improvement in resource allocation and
overall factor productivity.
Encouraging technical progress –
advances in knowledge make a key
contribution to economic growth.
Investing in people – education, training,
learning by doing, and management skills are
important sources of productivity growth.