1. Theory of economic growth
Macroeconomic
Theory of economic growth
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2. Agenda What is economic growth? The importance of economic growth.
Drivers of economic growth.
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3. Some Questions Why some countries are wealthier than other?
Why some countries are developing faster than other?
What were the causes of Industrial Revolution?
Is there a catching up?
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4. The biggest economies in the world
Rank
Country
GDP (millions of Int$) 1
 China
19,524,348 —
 European Union
19,137,699 2
 United States
17,946,996 3
 India
7,982,528 4
 Japan
4,738,294 5
 Germany
3,799,826 6
 Russia
3,579,826 7
 Brazil
3,198,898 8
 Indonesia
2,842,241 9
 United Kingdom
2,691,809 10
 France
2,650,823
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5. The wealthiest people live in:
Rank
Country
Int$
Year 1
 Qatar
141,543
2015 —
 Macau
111,497 2
 Luxembourg
101,926 3
 Singapore
85,382 4
 Brunei
78,369 5
 Kuwait
74,646 6
 United Arab Emirates
69,971 7
 Ireland
65,144 8
 Norway
61,197 9
  Switzerland
61,086
 Hong Kong
56,924 10
 United States
56,116
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6. The fastest developing countries
Rank
Country
Real GDP growth rate in percent (2015) 1
Ethiopia
10.20 2
Turks and Caicos Islands
9.40 3
Monaco
9.30 4
Cote d'Ivoire
8.50
Uzbekistan
Nauru 7
Republic of Ireland
7.80 8
Laos
7.60
India
7.30 9
Bangladesh
7.05 10
Dominican Republic
7.00
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7. The Malthusian Trap and Industrial Revolution
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8. The Malthusian Trap and Industrial Revolution
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9. The Malthusian Trap and Industrial Revolution
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10. Catching up
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11. Catching up
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12. What is economic growth?
It is an increase in the output that an economy produces over a period of time.
Usually, it is measured by the increase in real GDP or real GDP per capita.
While growth will rise and fall with cycles, there is a long-term trend line for growth.
It is an increase in the capacity of an economy to produce goods and services.
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13. What is economic growth?
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14. What is economic growth?
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15. What is economic growth?
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16. What is economic growth?
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17. Economic Growth vs. Development
Economic growth is not the same as economic development!
Economic growth means an increase in real GDP.
Economic development means an improvement in quality of life and living standards.
Economic growth usually leads to economic development.
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18. Why does economic development matter?
„Economic growth is necessary to keep the promise (...) that each generation will have the opportunity to become more prosperous than the preceding one.”
Michael Mandelbaum
Growth lessens the burden of scarcity.
Growth makes economy a positive-sum game.
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19. Why does economic development matter?
A small change in the growth rate can significantly affect a long-term standard of living.
Rule of 70 states that the approximate number of years required to double real GDP = 70 / annual percentage growth rate.
By improving growth from 3% to 4% we shave almost 6 years off of the time it takes for the economy to double in size!
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20. Why does economic development matter?
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21. Why does economic development matter?
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22. Why does economic development matter?
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23. Why does economic development matter?
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24. Why are some countries rich and some countries poor?
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25. Smith’s answer
„Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.”
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26. Wealth of Nations Smith’s answer Number of workers Productivity
Division
of labor
Capital accumulation
Number of workers
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27. Possible answers Natural resources and climate. Cultural factors.
Institutions.
Innovations.
Capital accumulation.
Division of labor.
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28. Institutions Matter
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29. Institutions Matter
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30. Institutions Matter
Institutions – rules of the game that structure economic incentives.
Rule of law (property rights, government integrity, judicial effectiveness).
Government size (government spending, tax burden, fiscal health).
Regulatory efficiency (business freedom, labor freedom, monetary freedom).
Open markets (trade freedom, investment freedom, financial freedom).
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31. Institutions Matter
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32. Institutions Matter
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33. Causes of Economic Growth
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34. Causes of Economic Growth
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35. Diminishing Marginal Returns to Capital
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36. The Role of Productivity
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37. The Role of Technology
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38. The Role of Technology
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39. The Role of Technology
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40. The Role of Technology
In 1950, one farmer in the U.S. fed 15 other people.
By 1995, that number had increased to 128 and continues to rise. 
As technology advances and farmers use more and more capital, not as many people are required to be in agriculture and are able to go produce cars, TVs, and other goods and services that we enjoy.
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41. How to Raise Productivity?
Education & Training (growth in the quality of labor, or human capital)
Improvements in Efficiency (increased division of labor and specialization)
Technology
Capital Accumulation (a rise in capital per employee)
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42. The Role of Capital Deepening
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43. The Role of Savings and Investments
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44. Summary
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45. Questions Explain what is the economic growth.
What is the difference between economic growth and economic development?
How the economic growth is measured?
What drives the long-run economic growth?
What are the policies that could speed economic growth?
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46. Questions
What is the relationship between institutions and long run economic development?
What is the optimal growth rate?
Based on the course material, argue for the following three possibilities:
Inequality may lead to lower growth
Inequality may be beneficial for growth
Inequality may be beneficial for growth in early stages of development, but may be harmful for growth at later stages of development
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47. Questions
Is it possible for an economy to continue growing forever solely by accumulating more capital? 
How does an increase in the saving rate affect economic growth?   
How does an increase in the population growth rate affect economic growth? 
Why do countries like the United States, Germany, and Japan all seem to be converging to the same level of per capita GDP? 
Why don’t all countries converge to the same level of per capita GDP as the United States, Germany, and Japan? 
How does an increase in the tax rate on income from capital affect economic growth?
economic_growth.htm
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48. Thanks for your attention!
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