Econ 13: Chapter 8 Economic Growth

What is economic growth?

An increase in productivity. When a GDP of a country keeps on growing.

Calculate how long it will take for a GDP of 100 to double with 2.5% growth rate

100(1+0.025) ^x = 200

x = 28

if the annual economic growth rate is a few percentages, what difference does it make on the economy?

Even just 3% or 5%, it can make an enormous difference in per capita GDP.

See how 8% in 10 years already doubled the GDP of 100 at the start

Formula for Growth rate of GDP over different time horizons

GDP at starting date x (1 + growth rate of GDP) ^ years = GDP at end date

What is productivity?

The value of what is produced per worker OR per hour worked

What does a countries standard of living depend on?

Goods and services

How do you measure productivity?

Productivity = Y/L (output per worker)

Y = real GDP, aka quantity of output produced

L = quantity of labor

Why is productivity so important?

1. Real GDP is large, so incomes are high

2. Living standards grow

What determines productivity and its growth rate?

1. Physical Capital, K

2. Human Capital, H

3. Natural Resources, N

4. Technological Knowledge

Physical Capital, K

The stock of equipment and structures used to produce g&s

K/L = capital per worker

When an average worker has more machines n equipment, productivity is higher, increase in K/L…increase in Y/L

Human Capital, H

the knowledge and skills workers acquire through education, training, and experience.

H/L = the average workers human capital

When a worker has more education and skills, their productivity is higher, increase H/L …increase Y/L

Natural Resources, N

the inputs into production, that nature provides. land, mineral deposits

N/L = number of workers to the quantity of land

When some countries have more natural resources, they are richer

when other things are equal, increase N/L …increase Y/L

Do countries need natural resources to be rich?

Not necessarily, some countries are rich because of their abundant resources

some countries are rich because they import the N needs

Technological Knowledge

1. society’s understanding of the best ways to produce g&s - (It doesn’t mean technological progress, like faster computer or higher-definition TV)

   It means any advance knowledge that boost productivity, allows society to get more output from its resources. Ex: assembly line

The aggregate production function

certain inputs, eg. H, K, A, lead to outputs

measured as GDP/Capita

What is the production function?

The process of a firm turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers.

What’s the production function formula?

Y =A F(L, K, H, N)

A = the level of technology

L = labor

K = Physical Capital

H = Human Capital

N = Natural Resources

What is capital deepening?

When an economy has a higher average level of physical and/or human capital per person.

Why is technology important for economic growth?

technology is new ways of producing stuff

to grow per capita GDP, is to improve H, K, and technology

What is convergence aka the catch up effect?

Poorer economies tend to grow faster than richer ones, and over time, their income levels or per capita GDP will become similar or "converge."

What is diminishing marginal return?

Growth Rate slows down

As more inputs are added, the additional output by each additional unit will eventually decrease, holding all other factors constant.

Why don’t all economies converge?

Not converging

1. slow growth

2. lower standards of living

3. trapped

BC of…

1. High birth rates

2. unstable economic development

3. no institutions

4. bad infrastructures

5. civil war

What are some policies that affect growth n productivity in the long run?

1. Saving and investment

2. investments from abroad

3. education

4. heath n nutrition

5. institutions, systems w/ property rights & political stability

6. R & D, source of new tech

In the long run, what is output determined by?

The quantity of inputs and their productivity