Economic Growth Why do we care about economic growth? What is economic growth? How do you think we can explain it? Productivity- The quantity of output.
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Economic Growth Why do we care about economic growth? What is economic growth? How do you think we can explain it? Productivity- The quantity of output produced from a unit of input. What determines productivity? -physical capital -human capital ( education and training, job experience) -New technology How does an increase in productivity impact the labor market and real output?
Theories of Growth Classical Growth Theory Classical growth theory or Malthusian theory (“the dismal science”) Malthus 1830 - “Food is necessary for the existence of man” … “passion between sexes is necessary, and will lead to out ultimate demise” Agree?? what has happened in the globe since then? In classical theory, when real income exceeds the subsistence real income, the population grows.
Theories of Economic Growth Neoclassical growth theory is the theory that real GDP per person will increase as long as technology keeps advancing. Growth stops if technology stops advancing because capital accumulation brings diminishing returns. New Growth Theory (Choices and Innovation) Economic growth is determined by the choices made in acquiring human capital and R&D. Both will increase labor productivity and economic growth. Question 1) What do the three theories predict on the differences between growth among nations? 2) In words and with diagrams compare the predictions of the classical growth theory to the new growth theory, if an economy makes a new discovery, increasing labor productivity.
ECONOMIC GROWTH Economic growth rate Growth of real GDP = Real GDP in current year Real GDP in previous year x 100 Real GDP in previous year –
Growth Remember that we are not only concerned with the value of total output. But also the standard of living. We want to calculate the growth rate in the standard of living. That is the growth rate of real GDP per capita. Question: If Real GDP in 2007 is $15million and the population is 4 thousand. Real GDP in 2008 is $20million and the population is 5 million. Calculate the growth rate of real GDP and the growth rate of real GDP per person. Growth of real GDP per person Growth rate of real GDP Growth rate of population – =
Rule of 70 Rule of 70 - Ques: The growth rate of RGDP in the U.S is 3%, that of China is 7%. How many years will it take each country to double the value of its output? QUESTION Show with words and in diagrams how aggregate hours determine the level of real GDP? How does a change in labor productivity impact the labor market and real output?
THE SOURCES OF ECONOMIC GROWTH Questions 1)Population growth brings an increase in national income. How? 3)Does this population growth improve general standard of living? Hint- think about GDP per capita and diminishing returns. Aggregate hours Labor productivity = Real GDP Real GDP = Aggregate hours x Labor productivity Ex: If RGP is $10billion and aggregate labor hours is 2 million hours. What is the economy’s labor productivity?
ACHIEVING FASTER GROWTH Policies to Achieve Faster Growth The main actions that governments can take to achieve these objectives are Encourage saving Encourage research and development Improve the quality of education Ques: How does each impact economic growth? Ex. Policy makers have been contemplating increasing the level of unemployment benefits. Evaluate the impact of such a policy on real GDP. In your response i)Define the opportunity cost of being unemployed ii)Describe in words and with graphs the impact of unemployment benefits on the labor market and output