UNIT 6: Economic growth, physical and human capital.
Economic Growth & Productivity
Economic Growth Defined
· Sustained increase in Real GDP over time.
· Sustained increase in Real GDP per Capita over time.
The question now is; why grow?
1. Growth leads to greater prosperity for society.
2. Lessens the burden of scarcity.
3. Increases the general level of well-being.
Conditions for Growth
· Rule of Law
· Sound Legal and Economic Institutions
· Economic Freedom
· Respect for Private Property
· Political & Economic Stability
· Low Inflationary Expectations
· Willingness to sacrifice current consumption in order to grow
· Saving
· Trade
Physical Capital
§ Tools, machinery, factories, infrastructure
§ Physical Capital is the product of Investment.
§ Investment is sensitive to interest rates and expected rates of return.
§ It takes capital to make capital.
§ Capital must be maintained.
Technology & Productivity
§ Research and development, innovation and invention yield increases in available technology.
§ More technology in the hands of workers increases productivity.
§ Productivity is output per worker.
§ More Productivity = Economic Growth.
Human Capital
§ People are a country’s most important resource. Therefore human capital must be developed.
§ Education
§ Economic Freedom
§ The right to acquire private property
§ Incentives
§ Clean Water
§ Stable Food Supply
§ Access to technology
Growth illustrated
Growth illustrated on a long run aggregate supply graph
Hindrances to Growth
Ø Economic and Political Instability
Ø High inflationary expectations
Ø Absence of the rule of law
Ø Diminished Private Property Rights
Ø Negative Incentives
Ø The welfare state
Ø Lack of Savings
Ø Excess current consumption
Ø Failure to maintain existing capital
Ø Crowding Out of Investment
Ø Government deficits & debt increasing long term interest rates!
Ø Increased income inequality à Populist policies
Ø Restrictions on Free International Trade
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