Transcript Fina 353-Lecture Slide Week 6

ECON203
Principles of Macroeconomics
Week 6
Topic: ECONOMIC GROWTH
Dr. Mazharul Islam
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Lesson Objectives
To learn about
After studying these topics you should be able to:
• Define and calculate the economic growth rate and
explain the implications of sustained growth.
• Describe the economic growth trend.
• Explain how population growth and labour productivity
growth make potential GDP grow.
• Explain and measure of the sources of labour
productivity of growth.
• Explain the policies designed to increase economic
growth.
Dr. Mazharul Islam
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Economic Growth
Economic Growth: It is a sustained
expansion of production possibilities. It is
not a temporary cyclical expansion and it is
different from the rise in income.
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Economic Growth
When resources are employed
efficiently, CI in each of the
panels shows the possible
combinations of consumer
goods and capital goods that
can be produced in a given
year.
Points C and I depict the
quantity of consumer and
capital goods produced if all
resources are used to produce
that good, respectively.
Positive Economic growth is
an outward shift of the PPF
in each of the two panels.
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Calculating Growth Rates
The Economic Growth Rate refers the change in
real GDP between two years.
Economic Growth Rate 
Real GDP (current year) - Real GDP (previous year)
 100
Real GDP (previous year)
Example: If real GDP in the current year is $
8.4 trillion and real GDP in the previous year
was $ 8.0 trillion then Growth Rate of Real
GDP = $ 8.4 trillion - $ 8.0 trillion x 100 = 5%
$ 8.0 trillion
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Sources of Economic Growth
Working age Population
Labor force participation
Average hours per worker
Physical capital
Human capital
•Education and training
•Job experience
Technology
Quantity
of labor
Labor
productivity
Total
Output
(Real
GDP)
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Productivity
Productivity measures how efficiently
resources are employed. The higher the
productivity, the more goods and
services that can be produced from a
given amount of resources  defined as
the ratio of total output divided by the
amount of a particular kind of resource
employed.
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Productivity
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Labor Productivity
Capital is the most responsible resource for
increasing labor productivity. New Technology is
another factor that increase labor productivity.
Two broad categories of capital
Human Capital
Accumulated knowledge, skill, (come from education and
training) and experience of the labor force. As individual
workers acquire more human capital, their productivity and
income increase
Physical Capital
Includes the machines, buildings, roads, airports,
communication networks and other manufactured
creations used to produce goods and services.
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Labor Productivity
Any point on the production function, PF,
shows how much output per worker can
be produced for a given amount of capital
per worker.
When there are k units of capital per
worker, average output per worker in the
economy is y.
Upward slope of the curve occurs because
an increase in capital per worker helps
each worker produce more output (Simon
Kuznets: 1/10 of the increase in
economic growth).
Output per worker
Expresses the relationship between the
amount of capital per worker (horizontal
axis) and the output per worker (vertical
axis), other things constant (level of
technology).
PF
y
0
k
Capital per
worker
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Impact of Technology on
Labor Productivity
PF'
Output per worker
Technological change
usually improves the
quality of capital and
increases productivity,
shown by the upward
rotation from PF to
PF'  more output is
produced at each level
of capital per worker
(Simon Kuznets:
9/10 of the increase
in economic growth).
y'
PF
y
0
Capital per worker
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Standard of living
The Real GDP (Output) per capita is the best
measure of economy’s standard of living.
Because it indicates how much an economy
produces on average per person.
Real GDP per person = Real GDP/ population .
Real GDP per person grows only if real GDP grows
faster than the population grows.
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Preconditions for Economic
Growth
An incentive system is requires for Economic Growth
that created by economic freedom, property rights ,
and markets. These three also depends on political
stability.
http://www.youtube.com/watch?v=y8HPZElenO8
http://www.youtube.com/watch?v=RAoMHt28gfM
 Economic Freedom refers a condition in which
people are able to make personal choices, and they
are free to buy and sell in the markets.
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Preconditions for Economic
Growth
Property rights refers the social arrangements that rule
the protection of private property. Property rights
include the rights to physical property, financial
property, and intellectual property. Property rights
provide the people with the incentive to work &
save.
Markets refers a place where buyers and sellers get
information and do business with each other, and where
market prices send signals to buyers and sellers that
create incentive to increase quantities demanded and
supplied. Free markets enable people to trade, save,
and invest.
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Preconditions for Economic
Growth
The previous three conditions (economic
freedom, property rights, and markets) work
together to create incentives for people to:
a. specialize and trade
b. save and invest
c. expand their human capital, and
d. discover and apply new technologies.
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Policies to achieve Faster
Economic Growth
To achieve faster economic growth we must
increase:
1. The growth rate of capital per hour of labor or
2. The pace of technological change.
The main suggestions for achieving these
objectives are:
a) Encourage (Stimulate) Saving
b) Encourage (Stimulate) Research and Development
c) Encourage International Trade
d) Improve the Quality of Education
e) Create incentive mechanisms
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Encourage (Stimulate) Saving
 In general, saving finances investment, which
brings capital accumulation. It means that
encouraging saving can increase the growth of
capital which turn to economic growth.
Higher saving rates
higher growth rates
 One way to increase saving is to make tax
incentives. Less tax
More saving.
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Encourage Research and
Development
 Since technological change is the fruit of research
and development (R&D), investment in R&D
reflects the economy’s efforts to improve
productivity.
 Government subsidies and direct funding might
stimulate basic research and development.
 Private organizations are funding for applied
research such as Apple Computer, iPhone, etc.
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Encourage International Trade
 Free international trade stimulates
economic growth by extracting all the
available gains from specialization
and trade.
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Improve the Quality of
Education
 By funding basic education and by ensuring
high standards in skills such as language,
mathematics, and science, governments can
contribute enormously to a nation`s growth
potential.
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Create incentive mechanisms
 Economic growth occurs when the incentives
to save , invest ,and innovate are strong
enough. These incentives require property
rights enforced by a well – functioning legal
system.
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Now it’s over for
today. Do you have
any question?
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