Development Review - Long Essay (Please circle one) Number __2__
2005
Copy the Question here:
Question:
What are the determinants of economic growth?
What are the 2-3 key words in the question to pay attention to? You should underline these in a real test situation.
List Verb(s) and Nouns (concepts):
determinants
Economic growth
What are the concepts to provide definitions for?
Define them precisely here:
Economic growth: The increase in real output of an economy over time. It can be one-time or sustained over a long period of
time. It is usually measured by the real GNP or real GNP per capita. For the rest of the essay, the focus will be on sustained
economic growth.
Structure of your answer
What graph should you
draw for this point?
What example can you
provide to illustrate your
point?
(Use numbered lists or bullet points: develop and explain your argument so that others can understand – no need to write
them out here as this is only for your review. Please insert more rows as necessary).
Remember to EVALUATE for Part B of Long Essays:
Comment:
At the very beginning, the idea should be highlighted that economic
growth is on REAL output, with inflation effect taken out. Thus,
The SRAS/AD/LRAS
graph should be drawn
government policies to increase aggregate demand can result in only
short run economic growth, and the economy will return to its long
run equilibrium eventually.
here.
Thus, the only way the economy can have sustained economic growth
is when the LRAS shifts to the right, or the PPF shifting to the right.
Thus the sources of such shifts are the sources of economic growth
over time. PPF can shift if quantity and/or quality of inputs change.
PPF shift rightwards
Sources of growth
1. Quantity of inputs
1. Land
But –diminishing returns
-Rcih natural resources may not sufficient for growth,
or unable to exploit—rely on MNCs
--Sacrifice future development—over exploitation of
natural resources (negative externalities)
2. Labor
Increased workforce
But
--diminishing returns—lower productivity
--low GNP per capita
3. Capital
Directly: factories, equipment,
Indirectly: road, etc
Productivity may increase—economic growth
But:
--Investment requires saving
--saving means sacrifice of current consumption
--opportunity cost of investment is particular high for
Develop polders to
increase the cropland are
windfalls: oil discoveries
natural gas newly
descoveried in South China
Sea
China with 10% economic
growth, but low
GDP/capita as huge
population
LDCs
--Saving may not sufficient for growth—vicious circle
--Inappropriate technology—should use more labor
intensive rather than capital intensive
Quality of inputs
There should be some evaluative comment here to emphasize that
quality of inputs is more important than quantity of
inputs to long term economic growth. Cannot just
passively list the factors.
1. Land
Green revolution: high yield gains
But
May impose negative externalities over the ecosystem—sacrifice
future development
2. Labor
Education and training—increase productivity—economic
growth
But
Spending on education has opportunity cost
3. Capital
Productivity
Generate high income
Technology progress—new markets and new demand
But
The challenge of appropriate technologies
But
Spillover: firms may not benefit fully from R&D
Externality graph
India—rice production
China & Japan--hybrid
seeds
Intel in Silica valley
There should be some evaluative element here: ie. capital
productivity, due to its spillover effects, is an very important
determinant of economic growth.
4. Role of entrepreneur
Gap-filler and input-completer
Innovator
But
Profit making regardless of externalities
The question is determinants of economic growth, not just sources or
factors. Your answer should help people understand why certain
countries grow faster than others. Merely listing the factors is not
sufficient to explain why some countries have all the resources but
still grow slowly.
In addition to the ones listed above, there should be other points to
consider (otherwise, growth is too easy!):
1.
2.
3.
4.
5.
Institutional
Legal
Historical
International environment
Government strategies
Summary Conclusion (one sentence)
Improvements of quantity and quality of factors of production can promote economic growth, but improved quality is more
desirable. In addition to the sources of growth, other factors play a key role as well.