LECTURE 2 :
MACROECONOMIC
GOAL – ECONOMIC
GROWTH
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Learning Outcome (s) November 14, 2021
At the end of the lecture, students will be able to :
define economic growth and discuss the factors that promote
economic growth
analyze the features of LDCs.
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The Basics of Economic Growth
Economic growth is the increase in GDP
over a given period.
• GDP = total market value of all final goods and
services produced within a country in a given
period of time.
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Growth rate
Growth rate =
Real GDP last year
Real GDP this year – Real GDP last year X
100
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GDP per person/ GDP per capita
GDP per person tells us the income and
expenditure of the average person in the economy.
GDP / Total population = GDP per capita
Higher GDP per person indicates a higher
standard of living.
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November 14, 2021
GDP per head (2020)
Malawi USD480
Cambodia USD1215
Uganda USD860
India USD2,338
Malaysia USD11,484
China USD8,130
Singapore USD58,500
UK USD39,800
US USD53,240
Japan USD47,200
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The Sources of Economic Growth
Aggregate Hours
– Aggregate hours, the total number of hours worked
by all the people employed, change as a result of:
– 1. Working-age population growth
– 2. Changes in the employment-to-population
ratio
– 3. Changes in average hours per worker
– Population growth increases aggregate hours and
real GDP.
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The Sources of Economic Growth
Labor Productivity
– Labor productivity is the quantity of real GDP produced by an
hour of labor; it equals real GDP divided by aggregate hours.
– The growth of labor productivity depends on
– Physical capital growth
– Human capital growth
– Technological advances
World bank (2005) found that higher productivity is strongly
and positively related with favourable “investment climate”
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The Sources of Economic Growth
Human Capital Growth
– Human capital acquired through education, on-
the-job training, and learning-by-doing is the most
fundamental source of economic growth.
– It is the source of increased labor productivity and
technological advance
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The sources of growth
Rate of savings
To provide funds for investment there need
to be a good level of savings. This should in
turn mean more growth in the future.
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The sources of growth
Technological progress
Increase production from the same quantity of
resources
boosts the potential level of output of the
economy.
The pace of technological change will depend
on:
• the scientific skills of the country
• the quality of education
• the amount of GDP devoted to research and development
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Sources of Growth
– Encourage International Trade
– Free international trade stimulates growth by extracting
all the available gains from specialization and trade.
– The fastest growing nations are the ones with the
fastest growing exports and imports.
– World Bank (2004) estimated that removing trade
protection in developed countries could provide gain to
developing countries of $ 85 b by 2015,
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November 14, 2021
Features of Less Developed Countries
(LDCs) -47 coutries
Low income per capita
earned less than 3% of the average employed
adult in US.
This is usually the result of low productivity, low
savings, low investment, less resources,
backward technology
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Features of Less Developed
November 14, 2021
Countries (LDCs)
High population growth
Many LDCs have experienced high population
growth rate.
47 LDCs have grown at 2.5% per annum over
the period 1975 – 2003, compared to only 0.6%
for high income countries.
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Features of Less Developed Countries
(LDCs)
Large scale of unemployment
Contributed by low level of economic activity
especially in industrial sector.
75 per cent of the LDCs' population still live in
poverty
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Features of Less Developed Countries
(LDCs)
Inequalities in the distribution of income.
The richest 10% in Sierra Leone have 43.6% of
all income but the poorest 10% have only 0.5%.
In Norway, richest 10% have 23. 4% of all
income and poorest 10% have 3.9% of all
income.
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Features of Less Developed
November 14, 2021
Countries (LDCs)
Large but neglected agricultural sector
In most LDCs, agriculture accounts for 40 – 85%
of national income and 60 – 90 % of total
employment.
Nevertheless, policy makers have opted for
industrialization, often at the expense of
agricultural development to promote rapid
economic growth.
Such neglect of agriculture has often led to food
shortages, poverty and famine.
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November 14, 2021
Features of Less Developed Countries
(LDCs)
Environmental degradation
Developing countries are acting as pollution
havens, particularly attractive to firms in toxic
intensive industries which release large
amounts of toxic chemicals per unit output.
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Features of Less Developed Countries
(LDCs)
Volatile export earnings
Foreign trade has tended to contribute relatively little to
national income of many LDCs. Many LDCs remain net
exporters of primary goods and net importers of industrial
goods.
Export of primary goods fluctuates due to fall in price ,
increase in supply of primary goods, low income elasticity
– rising prosperity in developed countries has resulted in
modest increases in demand for primary goods.
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Features of Less Developed November 14, 2021
Countries (LDCs)
Poor governance
Corruption.
In 2019 :
– Denmark 1,
– New Zealand – 1
– Finland – 3
– Singapore – 4
– India – 80
– Pakistan – 120
– Indonesia – 85
– Maaysia-53
constrain corruption is a key ingredient for growth and prosperity.
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The UN Millennium Development Goals for LDCs
Eradicate extreme poverty and hunger
Achieve universal primary education
Promote gender equality
Reduce child mortality
Combat HIV
Ensure environmental sustainability.
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Conclusion/Summary November 14, 2021
Economic growth of a country can be measured
using GDP. However, GDP is not a perfect
measurement because it excludes some important
factors. Business cycle shows the trend in GDP
growth rate. A country can achieve economic
growth by investing in human capital, technology,
increasing the volume of trade, increase savings,
promote research and development.
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November 14, 2021
References:
Griffiths, A. and Wall, S. Eds. (2011). Applied
Economics.
Financial Times Prentice Hall
Parkin,M (2008). Economics 8th edition, Pearson
International Edition.
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