Ch 10 Economic Growth 2023

Chapter 10: Economic Growth

Introduction to Economic Growth

• The possibility of economic growth has always existed.

• Significant growth has been observed primarily in the last century.

Importance of Economic Growth

• Measured as real GDP per capita.

• Key determinant of living standards.

• To enhance living standards, a country must increase the quantity of goods and services produced.

Growth in Real GDP per Capita

• Real GDP per capita combines real GDP with population to show the change in purchasing power over time.

• Growth rate calculation:

  • Real GDP per capita growth rate = nominal GDP growth rate – inflation rate – population growth rate

• Example Calculations:

  • Given data for different countries, apply the formula to find real GDP per capita growth rates.

Rule of 70

• Helps estimate the time required for an economy to double.

  • Formula: 70 / Growth rate per period = periods to double

• Example: Canada’s 2% growth rate translates to 35 years for economic doubling.

Factors Explaining Diversity in Economic Growth Rates

1. Increases in inputs

2. Increases in input utilization

3. Increase in productivity

• Productivity is the key determinant of living standards.

Productivity Defined

• Productivity (Y/L): Amount of goods/services produced per hour worked.

Components of Productivity

• Physical Capital (K): Includes tools, equipment, and structures for production.

• Human Capital (L): Encompasses skills, knowledge, experience, and abilities.

• Natural Resources (N):

  • Renewable Resources: Naturally replenished over time.

  • Non-renewable Resources: Finite and non-replenishable.

• Technology (A): Enables more output from the same inputs.

Production Function

• Equation relating inputs and outputs:

  • Y = A f(K, L, N)

  • Derived: Y/L = Af(K/L, N/L)

Importance of Saving and Investment

• Higher saving leads to more resources for physical capital; boosts productivity.

• Encouraging savings and investments fosters economic growth.

• A regulated financial market is crucial for growth (discussed in chapter 14).

Diminishing Returns

• As capital stock increases, GDP rises but additional capital yields smaller benefits over time.

• This leads to decreased growth rates despite higher productivity levels.

Convergence Theory (Catch-Up Effect)

• Countries with minimal physical capital realize more significant gains when investing.

• Poorer countries grow faster, potentially catching up with wealthier nations.

• Initial economic status not guaranteed to correlate with future growth rates.

Growth and Public Policy

• Investment trade-off involves reducing current consumption to boost future production/consumption.

• Domestic investment arises from domestic savings or foreign sources.

  • Domestic savings = domestic income - consumption.

  • Lower domestic savings than investment indicates foreign investment needs.

Foreign Investment: Benefits and Costs

• Benefits:

  • Attracting foreign direct investment (FDI) compensates for low domestic savings.

  • FDI can transfer human capital and technology.

• Costs:

  • Firms may seek tax benefits and legal exemptions.

  • Not all FDI guarantees capital and technology transfer.

Case Studies in Foreign Investment

• Examples from Canada show mixed approval of foreign investments in critical sectors:

  • BHP Billiton’s purchase of Potash Corp (2010) rejected.

  • Petronas and CNOOC's purchases approved in 2012.

GDP Growth and Energy Growth

• Data shows a relationship between global energy consumption and real GDP growth.

Decoupling of GDP Growth from Electricity Use

• Gross domestic product growth does not always correlate with electricity use growth.

Other Public Policies Affecting Economic Growth

• Effective governance and stable institutions are vital for fostering investment and trade.

• Free trade policies contribute positively.

• Investments in education and healthcare boost human capital development.

• Foreign aid can assist low-income countries, targeting poverty alleviation and infrastructure.

• Environmental concerns can impact the pursuit of economic growth.

Conclusion

• Understanding these components and policies is crucial for comprehending economic growth dynamics.