1. FINA 353 Principles of Macroeconomics Lecture 5 Topic: ECONOMIC GROWTH
HBC608HBC608
ECON582
HBC608
FINA 353 Principles of Macroeconomics Lecture 5 Topic: ECONOMIC GROWTH
College of Business – Rabigh
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 1

2. After studying these topics you should be able to:
HBC608HBC608
HBC608
ECON582
Lesson Objectives
To learn about
After studying these topics you should be able to:
Define and calculate the economic growth rate and explain the implications of sustained growth.
Describe the economic growth trend.
Explain how population growth and labour productivity growth make potential GDP grow.
Explain and measure of the sources of labour productivity of growth.
Explain the policies designed to increase economic growth.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 2

3. Economic Growth
HBC608HBC608
ECON582
HBC608
Economic Growth: It is a sustained expansion of production possibilities. It is not a temporary cyclical expansion and it is different from the rise in income.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 3

4. Economic Growth Dr. Mazharul Islam
HBC608
HBC608HBC608
Economic Growth
When resources are employed efficiently, CI in each of the panels shows the possible combinations of consumer goods and capital goods that can be produced in a given year.
Points C and I depict the quantity of consumer and capital goods produced if all resources are used to produce that good, respectively.
Positive Economic growth is an outward shift of the PPF in each of the two panels.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 4

5. Calculating Growth Rates
ECON582
HBC608
HBC608HBC608
Calculating Growth Rates
The Economic Growth Rate refers the change in real GDP between two years.
Example: If real GDP in the current year is $ 8.4 trillion and real GDP in the previous year was $ 8.0 trillion then Growth Rate of Real GDP = $ 8.4 trillion - $ 8.0 trillion x 100 = 5% $ 8.0 trillion .
Dr. Mazharul Islam
Finance notes
Finance NotesFinance notes 5

6. Sources of Economic Growth
HBC608HBC608
Sources of Economic Growth
HBC608
Working age Population
Labor force participation Average hours per worker
Quantity of labor
Total Output (Real GDP)
Labor productivity
Physical capital
Human capital
Education and training
Job experience
Technology
Dr. Mazharul Islam
Finance notes
Finance NotesFinance notes 6

7. HBC608HBC608
ECON582
HBC608
Productivity
Productivity measures how efficiently resources are employed. The higher the productivity, the more goods and services that can be produced from a given amount of resources  defined as the ratio of total output divided by the amount of a particular kind of resource employed.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 7

8. Productivity Dr. Mazharul Islam HBC608HBC608 ECON582 HBC608
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 8

9. HBC608HBC608
ECON582
HBC608
Labor Productivity
Capital is the most responsible resource for increasing labor productivity. New Technology is another factor that increase labor productivity.
Two broad categories of capital
Human Capital
Accumulated knowledge, skill, (come from education and training) and experience of the labor force. As individual workers acquire more human capital, their productivity and income increase
Physical Capital
Includes the machines, buildings, roads, airports, communication networks and other manufactured creations used to produce goods and services.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 9

10. Labor Productivity Dr. Mazharul Islam
HBC608HBC608
ECON582
HBC608
Labor Productivity
Expresses the relationship between the amount of capital per worker (horizontal axis) and the output per worker (vertical axis), other things constant (level of technology). y k PF
Capital per worker
Any point on the production function, PF, shows how much output per worker can be produced for a given amount of capital per worker.
Output per worker
When there are k units of capital per worker, average output per worker in the economy is y.
Upward slope of the curve occurs because an increase in capital per worker helps each worker produce more output (Simon Kuznets: 1/10 of the increase in economic growth).
Dr. Mazharul Islam
Finance notes
Finance NotesFinance notes 10

11. Impact of Technology on Labor Productivity
ECON582
HBC608
HBC608HBC608
Impact of Technology on Labor Productivity
Technological change usually improves the quality of capital and increases productivity, shown by the upward rotation from PF to PF'  more output is produced at each level of capital per worker (Simon Kuznets: 9/10 of the increase in economic growth). O u t p e r w o k y
Capital per worker PF y'
PF'
Dr. Mazharul Islam
Finance notes
Finance NotesFinance notes 11

12. HBC608HBC608
ECON582
HBC608
Standard of living
The Real GDP (Output) per capita is the best measure of economy’s standard of living. Because it indicates how much an economy produces on average per person.
Real GDP per person = Real GDP/ population .
Real GDP per person grows only if real GDP grows faster than the population grows.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 12

13. Preconditions for Economic Growth
HBC608HBC608
ECON582
HBC608
Preconditions for Economic Growth
An incentive system is requires for Economic Growth that created by economic freedom, property rights , and markets. These three also depends on political stability.
Economic Freedom refers a condition in which people are able to make personal choices, and they are free to buy and sell in the markets.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 13

14. Preconditions for Economic Growth
HBC608HBC608
ECON582
HBC608
Preconditions for Economic Growth
Property rights refers the social arrangements that rule the protection of private property. Property rights include the rights to physical property, financial property, and intellectual property. Property rights provide the people with the incentive to work & save.
Markets refers a place where buyers and sellers get information and do business with each other, and where market prices send signals to buyers and sellers that create incentive to increase quantities demanded and supplied. Free markets enable people to trade, save, and invest.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 14

15. Preconditions for Economic Growth
HBC608HBC608
ECON582
HBC608
Preconditions for Economic Growth
The previous three conditions (economic freedom, property rights, and markets) work together to create incentives for people to:
specialize and trade
save and invest
expand their human capital, and
discover and apply new technologies.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 15

16. Policies to achieve Faster Economic Growth
HBC608HBC608
ECON582
HBC608
Policies to achieve Faster Economic Growth
To achieve faster economic growth we must increase:
The growth rate of capital per hour of labor or
The pace of technological change.
The main suggestions for achieving these objectives are:
Encourage (Stimulate) Saving
Encourage (Stimulate) Research and Development
Encourage International Trade
Improve the Quality of Education
Create incentive mechanisms
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 16

17. Encourage (Stimulate) Saving
HBC608HBC608
ECON582
HBC608
Encourage (Stimulate) Saving
In general, saving finances investment, which brings capital accumulation. It means that encouraging saving can increase the growth of capital which turn to economic growth.
Higher saving rates higher growth rates
One way to increase saving is to make tax incentives. Less tax More saving.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 17

18. Encourage Research and Development
HBC608HBC608
ECON582
HBC608
Encourage Research and Development
Since technological change is the fruit of research and development (R&D), investment in R&D reflects the economy’s efforts to improve productivity.
Government subsidies and direct funding might stimulate basic research and development.
Private organizations are funding for applied research such as Apple Computer, iPhone, etc.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 18

19. Encourage International Trade
HBC608HBC608
ECON582
HBC608
Encourage International Trade
Free international trade stimulates economic growth by extracting all the available gains from specialization and trade.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 19

20. Improve the Quality of Education
HBC608HBC608
ECON582
HBC608
Improve the Quality of Education
By funding basic education and by ensuring high standards in skills such as language, mathematics, and science, governments can contribute enormously to a nation`s growth potential.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 20

21. Create incentive mechanisms
HBC608HBC608
ECON582
HBC608
Create incentive mechanisms
Economic growth occurs when the incentives to save , invest ,and innovate are strong enough. These incentives require property rights enforced by a well – functioning legal system.
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 21

22. Now it’s over for today. Do you have any question?
HBC608
ECON582
HBC608HBC608
Now it’s over for today. Do you have any question?
Dr. Mazharul Islam
Finance NotesFinance notes
Finance notes 22