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The concept of economic growth, its importance, and the factors that influence it. It delves into the measurement of economic growth using real gdp and real gdp per capita, highlighting the significance of growth for improving living standards. The document examines the role of resources, technology, and institutions in driving economic growth, discussing the aggregate production function and its determinants. It also explores the potential drawbacks and costs associated with economic growth, including environmental concerns and income inequality. The document concludes by examining policy implications for promoting economic growth, focusing on strategies to increase physical capital, human capital, and technological knowledge.
Typology: Exercises
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Picture: Downtown Toronto in 1898 (left) and 2014 (right). Their average growth rate over that time was 2-3% per year
Historic Growth Around 200 years ago, pretty much every country was poor GDP per capital was relatively even across countries Small differences in growth rates led to vast differences in GDP per capita over time Examples: ◦ (^) In 1950, Liberia was richer than Taiwan ◦ (^) Today, Liberia has a GDP per capita of about $1,000 while Taiwan is one of the richest countries in the world ◦ (^) Japan had much higher growth rates than the U.S. in the 1970’s ◦ (^) They were predicted to be the richest country in the world by 1985
Estimates of economic growth date back to A.D 1 For centuries (if not longer), economic growth remained incredibly low The Industrial revolution start the first dramatic increase in economic growth around the world
Physical capital: K ◦ (^) Used to expand the production process and increase future production ◦ (^) Includes stocks of equipment, machines, structures, land, etc. ◦ (^) Physical capital is not used up in the production process ◦ (^) But it does depreciate lose value over time due to “wear and tear” Labor: L ◦ (^) All the workers in the population of an economy ◦ (^) Equal to the labor force from our previous discussions ◦ (^) All employed and unemployed people
Technological Knowledge: A ◦ (^) A societal level of knowledge in the methods and processes of producing things ◦ (^) As technological knowledge increases, we get more output from every unit of inputs ◦ “We get better at making stuff” ◦ (^) Examples: ◦ (^) Implementation of the assembly line by Henry Ford ◦ (^) Production time dropped from 12 hours per car to 93 minutes ◦ (^) Refining crude oil ◦ (^) Gasoline used to be a by-product (that we dumped in rivers
We will focus on the ability of public policy to influence the amount of an individual determinant of production ◦ (^) If a determinant increases, production increases, causing growth It should be noted that: There is no single recipe for success when it comes to economic growth ◦ Policies that work for one country may not work for others ◦ (^) Policies that used to cause 3% may only cause 0.5% growth now Accurately measuring which policies help or hinder growth is extremely difficult ◦ (^) It requires us to use cross-country comparisons in most cases which are notoriously viewed with heavy skepticism by economists
Physical capital goods are purchased by firms to increase future production ◦ (^) Recall from our discussion of GDP that this is called investment spending Investment spending is directly tied to interest rates ◦ (^) There is a strong, negative correlation ◦ (^) As interest rates rises, investment (purchases of new physical capital) decreases ◦ (^) As interest rates fall, investment increases So if a country wants to increase the amount of physical capital it has, it needs to increase investment spending! ◦ One possible route is to decrease interest rates (which there are many ways to do)
