|
Economic growth is
- Often measured by the rate of change of real GDP
- although this has many deficiencies
- it omits output that is not bought/sold
- e.g. leisure, pollution, congestion
- it also neglects income distribution
- so higher GDP per capita does not necessarily mean greater happiness
The production function...
- shows the maximum output that can be produced using specified quantities
of inputs, given existing technical knowledge
- Output = f(capital,labour,
land, raw materials, technology)
Increasing output
- Capital
- output per worker may increase with capital per worker
- Labour
- population growth
- participation rates
- human capital
- Land
- fixed supply, but quality may be improved
Increasing output (2)
- Raw materials
- important distinction between
- depletable resources (coal,oil)
- renewable resources (timber, fish)
- Technical knowledge
- Economies of scale may reinforce the long-run growth process
Technical knowledge
- The state of technical knowledge changes through time because of:
- inventions
- embodiment of knowledge in capital
- learning by doing
- Research and development (R&D)
- patent systems address a market failure which otherwise would
lead to there being too little R&D.
Growth and accumulation
- Suppose Y = A × f(K, L)
- i.e. variable inputs capital (K) and labour (L) combine to produce
a given output
- A represents technical knowledge
- At very low levels of income, savings may be zero as all resources
are needed for consumption
- so capital cannot be created through investment
- and output may not be able to grow through time
Theories of growth: some key terms
- Along a steady-state path
- output, capital and labour are all growing at the same rate, so
output per worker and capital per worker are constant
- Capital-widening
- extends the existing capital per worker to new extra workers
- Capital deepening
- raises capital per worker for all workers
The Solow (neoclassical) growth model
- Assume
- labour grows at a constant rate n
- constant savings ratio s
- capital per worker is k; this is constant in the steady
state
- adding more capital per worker increases output per worker (y)
- but with diminishing returns.
The convergence hypothesis
- … asserts that poor countries will grow more quickly than average,
but rich countries will grow more slowly than average.
- i.e. poor countries should ‘catch up’
- but social and political differences may enable some economies to
catch up more effectively than others
Endogenous growth theory
- … recognizes that there may be significant externalities to capital
- known as ‘endogenous’ growth theory because it suggests that growth
may depend on parameters than can be influenced by private behaviour
or public policy
- governments should subsidize human and physical capital formation
The costs of economic growth
- Malthus in the 18th century warned of limits to growth
- but he underestimated the potential impact of technical change
- The price system helps to ensure a proper use of finite resources
- Growth may bring costs
- pollution, congestion, poor quality of life
- But lack of growth may impose costs also
- The assessment of the desirable growth rate remains a normative issue
|