PRINCIPLES OF MACROECONOMICS
Lecture 4
Economic Growth
References:
◼
N.G. Mankiw, “Principles of Economics”, 8th edition, chapters
33+34
◼
NEU, “Economics”, chapters 15, 18
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Content
1.
2.
3.
Definition and measurement
Determinants of economic growth
Economic policies to promote growth
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(a) Real GDP
Billions of
1992 Dollars
$7,000
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
Recessions
Real GDP
1965
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1970
1975
1980
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1990
19953
Country
Period
Real GDP per
Real GDP per
Person at
Person at End
Beginning of Period of Period
Growth Rate
(per year)
Japan
1890-1997
$1,196
$23,400
2.82%
Brazil
1900-1990
619
6,240
2.41
Mexico
1900-1997
922
8,120
2.27
Germany
1870-1997
1,738
21,300
1.99
Canada
1870-1997
1,890
21,860
1,95
China
1900-1997
570
3,570
1.91
Argentina
1900-1997
1,824
9,950
1.76
United States
1870-1997
3,188
28,740
1.75
Indonesia
1900-1997
708
3,450
1.65
United Kingdom
1870-1997
3,826
20,520
1.33
India
1900-1997
537
1,950
1.34
Pakistan
1900-1997
587
1,590
1.03
Bangladesh
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1900-1997
1,050
0.78
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1. Definition and Measurement
of economic growth
◼
◼
Economic Growth is the increase in real
output (or productivity) over time
Measurement:
Growth of total output =
Y (GDPrt )
GDPrt – GDPrt-1
Growth of productivity =
y (GDPrt/Labor Force)
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*
100 (%)
GDP rt-1
yt – yt-1
*
100 (%)
yt-1
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Calculate GDP over time
◼
◼
Y1 = Y0 (1+g)
Y2 = Y0 (1+g)2
◼ …
Yn = Y0 (1+g)n
◼ Yn = 2 x Y0 = Y0 (1+g)n
→ After n=70/g years, GDP is doubled
◼
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Double growth and Rule 70
◼
◼
Double growth: is the cumulative growth in
many years
Rule of 70 explains:
◼
If GDP grows by g%/year, it will get double
value after 70/g years
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Examples:
1.
If CPI increases at 70/6% monthly, calculate the
year’s inflation rate?
2.
Your parents saved $10,000 at the interest rate
3% when you were borned. How much do you
have when you are 70 years old?
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Rule 70
◼
Example: an investment of $5000 with the
interest rate 10% / year, it will be $10,000
after a period of time:
70 / 10 = 7 years
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2. Determinants of economic growth
◼
Theories of economic growth
◼
◼
◼
Adam Smith and Malthus
Keynes
Neo-Classical
→ Determinants to economic growth and
productivity
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Theories of economic growth
◼
Adam Smith và Malthus
◼
◼
◼
Keynes
◼
◼
◼
1776
Natural Resources and Labour
1940
Physical Capital
Neo-classical
◼
◼
1950s
Technology
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Determinants of growth
1.
Physical Capital - K
2.
Human capital – L / H
3.
Natural resources - R
4.
Technological Knowledge - T
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Production function
Total Output: Y = f (K, L, R, T)
1.
2.
3.
The production function is constant return to scale
The production function is diminishing return to scale
The production function is increasing return to scale
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Production function
Total Output: Y = f (K, L, R, T)
The production function is constant return to scale →
divide both side of the production function by L
→ Productivity: Y/L = y = f(K/L, H, R/L, T)
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3. Policies for Economic Growth
1) Domestic saving and investment → K
2) Investment from abroad → K
◼
◼
3)
4)
5)
6)
7)
Direct foreign investment: FDI
Indirect foreign investment: FII / FPI
Education and training → H
Property and Ownership Protection → K, H
Free trade → T
Population control → L
R & D activities → T
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Exercise:
What are the main determinants of growth
in the following production processes:
1.
Production of vegetables and flowers
1.
2.
3.
4.
2.
3.
4.
5.
K
L/H
R
T
Aviation travel
Car production
Education and training in university
Tourism
→ Suggest policies to promote the growth in the above production
processes (using policy implications of economic growth)
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Production of vegetables and
flowers
◼
Determinants of production and growth:
◼
◼
◼
◼
◼
K-capital: glass house, net system…
Labour force and human resource: farmers
R-natural resource: soil, water…
Technological knowledge: planting techniques…
Policies
◼
◼
◼
◼
K: investment → build water system…
L and H: education and training skills and experiences
R: reusable and non-reusable → how to utilise soil…
T: R&D for new methods in planting
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