Unformatted text preview: Chapter 12 Economic Growth, Resources, Technology and Ideas What is Economic Growth?
• Absolute Real Economic Growth: an increase in Real GDP from one period to the next. • Per Capita Real Economic Growth: an increase from one period to the next in per capita Real GDP, which is Real GDP divided by population. Economic Growth from an inefficient level of production
Economic growth when a country is operating below capacity – more of both capital and consumer goods are made available as the economy moves from point A to point B if you are at point a then you are in a recession, but if you are at point b then you are in LR eq and you are on some point on LRAS. Economic Growth from an efficient level of production
Country operating at full capacity but discovers new resources or find ways of improving the efficiency of existing resources, for example, education of the population to improve the quality of human capital. at c' then that means you are more efficient with lower price levels, if the ad curve shifts out and the LRAS curve shifts as well, you either have a more efficient with the same price level - point c'' or you have both rising Economic Growth and the Price Level
• Economic Growth can occur with:
– a falling price level; – a rising price level; – A stable price level. • In recent decades, the US economy has witnessed economic growth with a rising price level. all of these have a bi-causal relationship because if you have more economic growth then you will have more capital, if you have more growth then you will have better tech, one causes the other and vise versa. What Causes Economic Growth?
• • • • • • • Natural Resources Labor Capital Technological Advances Free Trade as Technology Property Rights Structure Economic Freedom it is not quantity, it is how you used what you hav it is not how many workers you have, but how good the workers are, for insta if you have a lot of lazy people then you wont get much done, whereas you wi get more done if you have more efficient workers. if you invest more in capital then your labor output and efficiency will go up more R&D then you will have higher level of economic growth trade is valueless therefore you can trade with anyone for no extra money if you have a more secure property rig environment the more you produce, beca you keep more of the money you make capitalism and democracy allows you to keep and make more money, therefore you will do more. Policies to Promote Economic Growth
• When the economy is situated below its PPF, demand inducing expansionary monetary or fiscal policy is often advocated. • There are supply-side policies too:
– – – – – – – natural resources Labor increases in human capital increases in physical capital investment technological advances property rights structure economic freedom. What About Industrial Policy?
• Industrial policy: a deliberate government policy of aiding
those industries that are most likely to succeed in the world marketplace. • Pros: Government needs to work with business firms in the
private sector to help them compete in the world marketplace. • Cons:
– government may favor industries with more political influence – officials who design policy don’t know what will be the industries of the future – officials are likely to hamper growth if they provide protection to certain industries. Economic Growth and Special Interest Groups
• Types of Economic Policies
– Growth-Promoting – Transfer-Promoting transfer is motivated by self interest, this creates self interest group, and they are not really concerned with helpi economy, only themselves. • In The Rise and Decline of Nations, Olson argues special interest groups are more likely to argue for transfer-promoting policies. • Numerous and politically strong special interest groups are detrimental to economic growth.
if the special interest groups can actually cause the economy to have no or negative economic growth New Growth Theory
• Three Drivers of Long-Term Growth Proposed:
– Machinery and Equipment – Human Capital – Research and Development ...
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- Spring '08
- Economics, per capita