Economic Growth
Economic Growth
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Summaries
Labor
Productivity: Real GDP
per labor hour
Economic
growth = % change in
productivity
Incentive
system for economic growth:
1) Market => information for demand
and supply
2) Property right => save and
investment
3) Monetary Exchange => enable
specialization
Factors
drive economic growth:
- Investment in capital –
physical capital per labor
- Investment in human capital
- Discovery of new technologies
Productivity
Curves:
Plots of productivity (real GDP/labor-hour) vs
capital/labor-hour for a given technology.
Law of
diminishing Returns applies.
Technology
growth shift curves upwards.
One-third
rule: 1% change in
capital labor-hour results in 1/3% change in productivity (real GDP/labor –hour)
How
to increase productivity?
Encourage
Savings (willing to reinvest)
Encourage
Basic R&D (for technology advancement)
Encourage
International Trades (specialization)
Encourage Education
(capital investment)
Classical
Growth Theory:
Not
permanent economic growth; When productivity is more
than the subsistence level (either through technology advancement or capital
investment), there will be population boom (because real wage is more than the subsistence real wage (this
is the basic assumption)); diminishing return of labor (In the 3rd
axis other than the productivity curves?) (also
capital / labor reduces?) and thus drops back to
subsistence level.
Neo
Classical Growth Theory:
Birth rate
and death rate decrease with economic growth => population is independent of
economic growth.
Technology
is the drive of economic growth
Real
rates of return –
tangents of productivity curves
Target rate
of return (this is the basic
assumption)
When growth
stops, target rate of return = real rate of return
When real
rate of return < target rate of return, saving reduces and growth stops
New
Growth Theory
Knowledge
is not subjected to the law of diminishing return (this
the basic assumption)
Innovation
(is discovered out of luck) => higher profits => competitions => low
profits (drive another cycle of innovation) (this the
basic assumption)
Knowledge
if public goods
There is
not mechanism to stop economic growth
Real
interest rate is consistently above the target rate of return