EC111LectNG19

EC111LectNG19 - 1 EC111 MACROECONOMICS Spring Term 2012...

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Unformatted text preview: 1 EC111 MACROECONOMICS Spring Term 2012 Lecturer: Jonathan Halket Week 24 Topic 9: ECONOMIC GROWTH AND DEVELOPMENT Begg Chapter 26. We have been concerned so far with short run adjustments to national income, which affect the utilisation of the economy’s resources. In the long run—decades rather than years—we are more concerned with the growth of the productive capacity of the economy. Per capita GDP Multiples and Annual Growth rates 1950/1870 Growth rate % 2006/1950 Growth rate % Austria 2 0.9 6.1 3.2 Belgium 2 0.9 4.2 2.6 Denmark 3.5 1.6 3.6 2.3 Finland 3.7 1.6 5.5 3.0 France 2.8 1.3 4.5 2.7 Germany 2.1 0.9 5.2 2.9 Italy 2.3 1.0 5.7 3.1 Netherlands 2.2 1.0 3.9 2.4 Norway 4 1.7 5.1 2.9 Sweden 4.1 1.8 3.6 2.3 Switzerland 4.3 1.8 2.6 1.7 United Kingdom 2.2 1.0 3.3 2.1 Ireland 1.9 0.8 8.1 3.7 Greece 2.2 1.0 8.2 3.8 Portugal 2.1 0.9 6.8 3.4 Spain 1.8 0.7 8.6 3.8 Australia 2.3 1.0 3.3 2.1 New Zealand 2.7 1.2 2.2 1.4 Canada 4.3 1.8 3.4 2.2 United States 3.9 1.7 3.2 2.1 We noted before that modest growth rates can cumulate to large multiples in per capita income over decades. Note that, even in the developed world there are large differences in growth rates and therefore in income multiples. Note the slow growth of the UK after 1950 as compared with Greece or Ireland. 2 A model of economic growth We shall assume that the economy is close to full employment. The three main sources of growth in total output are: Labour force growth (more precisely the number of worker hours) Growth of the capital stock Technical progress (the growth of output per unit of factor inputs) Other sources of economic growth such as increases in land and, in particular, education and training will be ignored (or subsumed under the other headings). We can write the aggregate production function as: Thus real national income, Y, is produced by fully employing the available stock of capital and labour. T is the overall productivity or efficiency with which these factors produce output. This is directly analogous to the production function of the individual firm, but at the national level. We can draw a production isoquant for the economy as a whole. Recall that this shows the combinations of labour and capital that can produced a given level of output. K K 2 K 1 Slope = – (W/R) 1 Y 1 L 1 L Y 2 Slope = – (W/R) 2 3 With factors L 1 and K 1 the economy can produce and output level Q 1 . Note that in order to ensure that both factors are fully employed the factor price ratio must be (W/R) 1 where W and R are the factor prices of capital and labour. This is the slope of a line tangent to the production function. If the stock of capital increased to K 2 then full employment output would be Q 2 . Note that to ensure that capital is fully employed the factor price of capital must fall (because there are diminishing returns) and so the factor price line becomes steeper....
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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.

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EC111LectNG19 - 1 EC111 MACROECONOMICS Spring Term 2012...

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