Economic Growth Economic Growth, in general, means increase in economic (material) well being of average citizen.
Economic Growth Economic Growth, in general, means increase in economic (material) well being of average citizen. It is measured as the rate of change in the real per capita income (real GDP).
Economic Growth Economic Growth, in general, means increase in economic (material) well being of average citizen. It is measured as the rate of change in the per capita income (GDP). That is to say, if a nation’s output of goods and services outpace population growth, average real per capita income will increase and therefore, average individual will be materially better off than before.
Economic Growth Measuring economic growth is problematic because: data problem (collection frequencies, accuracy)
Economic Growth Measuring economic growth is problematic because: data problem (collection frequencies, accuracy) distribution of the GDP
Economic Growth Measuring economic growth is problematic because: data problem (collection frequencies, accuracy) distribution of the GDP better living standard? (work v. leisure)
Economic Growth Measuring economic growth is problematic because: data problem (collection frequencies, accuracy) distribution of the GDP better living standard? (work v. leisure) Quality improvement
Short v. Long Run Short run is defined as a period short enough that labor is the only factor that could be increased to raise output. N y Y=f(N)
Short v. Long Run Long run is defined as a period long enough that we can change the capacity of production. In this case, K and L as productivity become determining factors in economic growth. N y Y=f(N, K) * A
Determinants of Growth Economic growth could result from: increase in supply of labor
Determinants of Growth Economic growth could result from: increase in supply of labor population growth
Determinants of Growth Economic growth could result from: increase in supply of labor population growth immigration
Determinants of Growth Economic growth could result from: increase in supply of labor population growth immigration increase in capital stock
Determinants of Growth Economic growth could result from: increase in supply of labor population growth immigration increase in capital stock increase in productivity
Increase in Supply of labor y y y y W N N F(N)
Increase in Supply of labor y y y y W N N F(N)
Increase in Supply of labor y y y y W N N F(N)
Increase in labor productivity y y y y W N N F(N)
Increase in labor productivity y y y y W N N F(N) F’(N)
Increase in labor productivity y y y y W N N F(N) F’(N) W W’ NN’ yy’ y
Capital and Investment Capital is the total quantity of plant, equipment, buildings, and inventories. Gross investment is the purchase of new capital.
Capital and Investment Depreciation is the wearing out and scrapping of existing capital. Net investment is gross investment minus depreciation.
Capital and Investment Private investment is business investment plus investment in new homes and addition to inventories. Government investment is the part of government purchases that creates social infrastructure capital.
Investment and the Capital Stock: 1970–1998
Investment in the United States and World: 1970–1998
Investment Decisions Business investment decisions are influenced by: 1) The expected profit rate 2) The real interest rate
Investment Decisions The Expected Profit Rate The greater the expected profit rate from new capital, the greater is the amount of investment.
Investment Decisions The Expected Profit Rate Three Major Factors Affecting the Expected Profit Rate 1) The phase of the business cycle affect expected rates of profits : In recessions sales and profits fall while during expansions sales and profits rise. Therefore, during recessions (expansions) investment demand falls (rises) 2) Advances in technology 3) Taxes
The Real Interest Rate
Investment Decisions The Real Interest Rate –The opportunity cost of funds is the real interest rate.
Investment Decisions The Real Interest Rate –The opportunity cost of funds is the real interest rate –The lower the real interest rate, the greater is the amount of investment..
Investment Decisions The Real Interest Rate –The lower the real interest rate, the greater is the amount of investment. –The opportunity cost of funds is the real interest rate. –If the real interest rate exceeds the expected profit rate, firms should not invest in new capital since they could earn more by loaning the funds to other firms.
Investment Decisions Investment Demand Illustrates the relationship between investment and the real interest rate.
ID Investment Demand Investment (trillions of 1992 dollars) Real interest rate (percent per year ) a c b A rise in the real interest rate decreases investment A fall in the real interest rate increases investment 0.8
Investment Demand Investment (trillions of 1992 dollars) Real interest rate (percent per year) ID 0 ID 1 ID 2 An increase in the expected profit rate increases investment demand A decrease in the expected profit rate decreases investment demand
Investment Demand in the United States Recession of 1991 Expansion of 1990s
Saving Decisions National Saving The sum of private saving and government saving.
Saving Decisions The main factors affecting household saving are: –The real interest rate The lower the real interest rate, the smaller is the amount of saving and the greater is the amount of consumption.
Saving Decisions The main factors affecting household saving are: –The real interest rate The lower the real interest rate, the smaller is the amount of saving and the greater is the amount of consumption. –Disposable income The greater a household's disposable income the greater is its saving.
Saving Decisions The main factors affecting household saving are: –The real interest rate The lower the real interest rate, the smaller is the amount of saving and the greater is the amount of consumption. –Disposable income The greater a household's disposable income the greater is its saving. –Purchasing power of net assets The greater the purchasing power of a household’s net assets the less is its saving. Net assets are assets minus debts
Saving Decisions The main factors affecting household saving are: –The real interest rate The lower the real interest rate, the smaller is the amount of saving and the greater is the amount of consumption. –Disposable income The greater a household's disposable income the greater is its saving. –Purchasing power of net assets The greater the purchasing power of a household’s net assets the less is its saving. Net assets are assets minus debts –Expected future income The lower a household’s expected future income the greater is its saving.
Saving Decisions Saving Supply Illustrates the relationship between saving and the real interest rate
SS Saving Supply Saving (trillions of 1992 dollars) Real interest rate (percent per year) a b c A fall in the real interest rate decreases saving A rise in the real interest rate increases saving 2
Saving Supply Saving (trillions of 1992 dollars) SS 0 Real interest rate (percent per year) An increase in saving supply A decrease in saving supply 2 SS 1 SS 2
Saving Supply in the United States: 1970–1998
Saving and Investment in the National Economy Saving supply and investment demand in the world economy determine the world real interest rate. Saving does not necessarily equal investment in a national economy.
Saving and Investment in the National Economy National investment is financed by national saving plus borrowing from the rest of the world. For the world as a whole, international borrowing equals international lending.
Saving and Investment in the National Economy Each nation contributes to world saving and investment and so influences the world real interest rate. A nation’s saving and investment decisions, along with the world real interest rate, determine the amount the nation borrows from or lends to the rest of the world.
Saving, Investment, and International Borrowing Investment and saving (trillions of 1992 dollars) Real interest rate (percent per year) SS ID World real interest rate International borrowing