ECO105_LEC02 - Notes for Lecture 2: The Grand Design of...

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Notes for Lecture 2: The Grand Design of Rostow’s Take-Off Theory and the Golden Age of Capitalism: 1950 to 1973 [September 18, 2007] Economic Concepts: the what, how and for whom questions, stock versus flow, real inputs and real output, production function, factors of production, definition of capital, definition of investment, exogenous factors, factor rewards, ‘final’ goods and services, intermediate goods and services, value added, three means of determining GDP, statement of final goods [GDP], statement of net domestic income and GDP, a simple economic growth model, Rostow’s five stages of economic growth; the pre-conditions for take-off, the take-off, agricultural contributions during the pre-conditions, the importance of social overhead capital [economic infrastructure], the investment requirement for take-off, leading sectors, derived linkage investment impacts, the Kuznets’ critique, ‘miracles’ of economic growth since 1950, per capita GDP per capita in U. S. dollars – two methods: the foreign exchange rate method and the purchasing power parity [PPP] method, the contribution by Lipsey in the 1996 Benefactor’s Lecture. The Production Function and Factors of Production A production function is a relationship between inputs and a particular output. Inputs include factors of production and intermediate goods and services. There are [only] four factors of production: labour [L], land {T], capital [K] and entrepreneurship [E] . Intermediate goods and services [e.g., raw materials, energy and water] are consumed in the productive activity and reappear in a different form. For example, resin can be transformed into plastic packages. Capital is narrowly defined in economics to include three types of assets: housing, manufacturing plants together with office buildings and major machinery and equipment. Investment is also narrowly defined in economics to mean capital formation i.e., the production of more housing, more plants and more machinery and equipment. Those offering the services from these four factors of production will receive a monetary reward: labour [wages], land [rent], capital [interest] and entrepreneurship [profits]. When the production function is analyzed, exogenous [outside] factors, such as technology and weather conditions, are assumed to be constant i.e., innovation and changes in weather conditions would not be allowed unless exogenous variables are permitted to change. Measurement of Economic Activity: Gross Domestic Product [GDP] There are three means of calculating the level of economic activity which occurs within a country during the specified year: the final goods and services approach, the factor income approach and the value added approach. These approaches were demonstrated during the lecture.
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In the final goods and services approach , GDP is the sum of five final goods and services less imports in a country during the specified year. Final goods and services are defined as sales to: households [consumer goods and services], to industry [on capital account], to government, to
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ECO105_LEC02 - Notes for Lecture 2: The Grand Design of...

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