Ch 10 Economic Growth 2023

Chapter 10: Economic Growth

Importance of Economic Growth

• Economic growth has always been a possibility but became significant only in the last century or so.

• It is a key determinant of living standards and is measured as real GDP per capita.

• To achieve a higher standard of living, a country must increase the production of goods and services.

Growth in Real GDP per Capita

• Real GDP per capita combines real GDP data with population figures, describing individual purchasing power over time.

• The growth rate of real GDP per capita can be calculated using the formula:real GDP per capita growth rate = nominal GDP growth rate – inflation rate – population growth rate

• This formula allows for analysis of economic performance on an individual basis, highlighting how national growth translates to personal improvement.

Application of Real GDP per Capita Growth Equation

• Example calculations illustrate real GDP per capita growth in different countries by filling in missing values based on the formula provided.

• Key examples are drawn from Panama, Guatemala, and Italy to compare nominal GDP growth, inflation rates, and population growth, leading to final real GDP per capita growth percentages.

Rule of 70

• The Rule of 70 is a heuristic used to estimate the time required for an economy to double its size under constant growth rates.

• Formula: 70 / Growth Rate = Number of years to double.

• For instance, at a growth rate of 2% per year, the economy would double in approximately 35 years.

Factors Explaining Economic Growth Rates

• Diversity in global economic growth rates can be attributed to:

  1. Increases in input quantities.

  2. Improved efficiency in utilizing these inputs.

  3. Increases in overall productivity.

• The foremost factor in determining living standards is the increase in productivity.

Understanding Productivity

• Productivity is defined as the amount of goods and services produced per hour of labor.

• Enhancing productivity relies on various components:

  • Physical capital (K): Tools and machinery for production.

  • Human capital (L): Skills and knowledge that enhance worker efficiency.

  • Natural resources (N): Inputs sourced from the environment, categorized as renewable and non-renewable.

  • Technology (A): Innovations that enable greater output from the same inputs.

Production Function

• The production function is a mathematical expression that demonstrates the relationship between inputs and outputs:Y = Af(K, L, N).

• This formula can be rearranged to focus on productivity per labor unit:Y/L = Af(K/L, N/L).

Importance of Saving and Investment

• Increasing productivity necessitates saving and investing more in physical capital.

• Strong savings foster domestic investment, which is crucial for economic growth and improved living standards.

• A capable financial market enhances access to capital, which supports this growth.

Diminishing Returns

• Increased capital stock leads to heightened productivity and GDP increases; however, the benefits derived from additional capital diminish over time.

• Consequently, while higher savings can elevate productivity, they do not guarantee an ongoing increase in growth rates, as illustrated in the diminishing marginal returns model.

Convergence Theory

• The catch-up effect suggests that countries with lower initial capital stocks will achieve higher returns on their investments compared to wealthier nations.

• This theory posits that poorer countries can grow at faster rates until they converge with richer economies, although starting poor does not guarantee sustainable growth rates.

Growth and Public Policy

• Economic growth involves investment trade-offs, where immediate consumption is reduced in favor of future production capabilities.

• Domestic and foreign investment both play crucial roles in sustaining growth, with the importance of domestic savings highlighted in balancing economic activities.

Foreign Direct Investment Benefits and Costs

• Attracting foreign direct investment (FDI) can infuse capital and technology into local economies, enhancing human capital development.

• However, FDI can come with costs, such as tax incentives for foreign firms and uncertain gains in technology transfer.

Canadian Case Studies

• Examples of foreign acquisitions in Canada highlight the balancing act of permitting foreign investments while maintaining control over key industries.

• Notable case studies include failed and approved takeovers of Canadian companies by foreign entities.

Additional Insights on GDP and Energy

• Analysis of energy growth alongside GDP growth offers insights into resource utilization in relation to economic development, presenting visual data on trends in energy consumption versus economic output.

Other Public Policy Considerations

• Effective governance, stability in leadership, and open trade policies are crucial for attracting investment.

• Investment in education and healthcare improves human capital, further influencing economic growth potential.

• For low-income nations, international aid and funding for infrastructure are justified by the need to combat poverty and promote sustainable development.

Conclusion

• In conclusion, the relationship between economic policies, growth rates, and productivity is complex and multifaceted, underscoring the importance of strategic planning for sustainable economic development.