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
Increases in inputs
Increases in input utilization
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.