The basis of economic growth
- Economic growth is the sustained expansion of production
possibilities.
- Rapid growth can transform a poor nation into rich one, e.g.
Singapore
- Slow growth transformation can lead a nation to devasting poverty,
e.g. Africa
Calculating Growth rate
Growth rate = percentage change of a variable
- The change in the variable as a percentage of the initial level
Real GDP growth rate
= Real GDP in current year – Real GDP in previous
X 100%year
Real GDP in previous years
The growth rate of real GDP = how rapidly the total economy is
expanding.
Read GDP per person growth rate = growth rate of real GDP –
growth population
Living standard will rise if GDP grow faster than population growth
Exponential growth
- Small distance in growth, due to many years, will lead to a huge gap
in countries.
Factors of real GDP
- Capital (ST)
- Labour (not fixed in ST) (variable factor: not fixed in the ST)
- Entrepreneurship (ST)
- Land (ST)
Potential GDP:
- is the level of real GDP when the quantity of labour employed is the
full employment quantity.
- To determine potential GDP, we use a model with two components:
o Aggregate production function
o Aggregate labour market
- Two factors that determine potential GDP of an economy
o Quantity of labour at full employment (at equilibrium)
o What can be produced at full employment based on its
production function. (labour production)
Aggregate production function
- how real GDP changes as the quantity of labour changes (assuming
other factors remain the same)
- Upwards sloping, flatter and flatter (shape of the curve)
Macroeconomics: One large labour market that determines the quantity of
labour employed and the quantity or real GDP produced.
- Increase in labour hours brings an increase in real GDP
Aggregate Labour Market
Demand for labour: relationship between quantity of labour demanded
and the real wage rate.
- Real wage rate (Quantity of good and services that an hr of money
wage can buy)
= money wage rate (number of dollar that an hr of labour earns) /
price level
Supply of labour:
- relationship between quantity of labour supplied and the real wage
rate.
- Quantity of labour supplied: number of labour hours that all
households in the economy plan to work during a given period.
- Depends on real wage rate
Both labours demanded and supplied depends on the real wage
rate.
Labour market equilibrium: Q of labour demanded = Q of labour
supplied
- No shortage or surplus.
- If above equilibrium, quantity supplied > quantity demanded
o Surplus of labour
o Pressure for real wage rate reduce
- If below equilibrium, quantity demanded > quantity supplied
o Shortage of labour
o Pressure for real wage rate increase
Potential GDP: is just the quantity of real GDP produced when the
economy is at full employment.
What increases labour productivity (quality of labour)
1) Physical capital growth
- The accumulation of new capital increases capital per worker and
increases labour productivity
2) Human capital growth (skill and knowledge)
- Human capital acquired through education, on the job training and
learning by doing is the most fundamental source of labour
productivity growth.
3) Technological advances
- The discovery and the application of new technologies has
contributed immensely to increasing labour productivity.
Labour productivity: real gdp / aggregate hours of labour
Policies for achieving faster growth
1) Physical capital growth > how to encourage capital growth >
stimulate investment (more investment means companies buy more
machines and equipments)
2) Human capital growth > how to encourage human capital growth >
improve the quality of education.
3) Technological advances > how to promote technological advances >
the government have to stimulate the research and development.
4) Encourage International Trade
Policies for achieving gaster growth rate
- Stimulate investment:
o lower rate, tax reduction (what can the government do)
- Improve the quality of education, polices:
o compulsory education, education subsidy
- Stimulate the research and development:
o R&D subsidy, Direct funding
- Encourage International Trade:
o The fastest growing nations are the ones with the fastest
growing exports and imports.
Global Inequality
Household monthly income per person =
G ross household monthly income
N umber of family members living together
Small differences in growth rates sustained over a number of years can
bring huge differences in the standard of living