1. 1 ECON203 Principles of Macroeconomics Week 6 Topic: ECONOMIC GROWTH Dr. Mazharul Islam

2. 2 Lesson Objectives  To learn about After studying these topics you should be able to: Define and calculate the economic growth rate and explain the implications of sustained growth. Describe the economic growth trend. Explain how population growth and labour productivity growth make potential GDP grow. Explain and measure of the sources of labour productivity of growth. Explain the policies designed to increase economic growth. Dr. Mazharul Islam

3. 3 Economic Growth Economic Growth: It is a sustained expansion of production possibilities. It is not a temporary cyclical expansion and it is different from the rise in income. Dr. Mazharul Islam

4. 4 Economic Growth Dr. Mazharul Islam When resources are employed efficiently, CI in each of the panels shows the possible combinations of consumer goods and capital goods that can be produced in a given year. Points C and I depict the quantity of consumer and capital goods produced if all resources are used to produce that good, respectively. Positive Economic growth is an outward shift of the PPF in each of the two panels.

5. 5 Calculating Growth Rates The Economic Growth Rate refers the change in real GDP between two years. Dr. Mazharul Islam Example: If real GDP in the current year is $ 8.4 trillion and real GDP in the previous year was $ 8.0 trillion then Growth Rate of Real GDP = $ 8.4 trillion - $ 8.0 trillion x 100 = 5% $ 8.0 trillion.

6. 6 Dr. Mazharul Islam Sources of Economic Growth Working age Population Labor force participation Average hours per worker Working age Population Labor force participation Average hours per worker Physical capital Human capital Education and training Job experience Technology Physical capital Human capital Education and training Job experience Technology Quantity of labor Labor productivity Total Output (Real GDP)

7. 7Productivity Dr. Mazharul Islam Productivity measures how efficiently resources are employed. The higher the productivity, the more goods and services that can be produced from a given amount of resources  defined as the ratio of total output divided by the amount of a particular kind of resource employed.

8. 8Productivity Dr. Mazharul Islam

9. 9 Labor Productivity Dr. Mazharul Islam Capital is the most responsible resource for increasing labor productivity. New Technology is another factor that increase labor productivity. Two broad categories of capital Human Capital Accumulated knowledge, skill, (come from education and training) and experience of the labor force. As individual workers acquire more human capital, their productivity and income increase Physical Capital Includes the machines, buildings, roads, airports, communication networks and other manufactured creations used to produce goods and services.

10. 10 Labor Productivity Dr. Mazharul Islam y k PF 0 Capital per worker Expresses the relationship between the amount of capital per worker (horizontal axis) and the output per worker (vertical axis), other things constant (level of technology). Any point on the production function, PF, shows how much output per worker can be produced for a given amount of capital per worker. When there are k units of capital per worker, average output per worker in the economy is y. Upward slope of the curve occurs because an increase in capital per worker helps each worker produce more output (Simon Kuznets: 1/10 of the increase in economic growth). Output per worker

11. 11 Impact of Technology on Labor Productivity Dr. Mazharul Islam O u t p u t p e r w o r k e r y 0 Capital per worker PF y' PF' Technological change usually improves the quality of capital and increases productivity, shown by the upward rotation from PF to PF'  more output is produced at each level of capital per worker (Simon Kuznets: 9/10 of the increase in economic growth).

12. 12 Standard of living Dr. Mazharul Islam The Real GDP (Output) per capita is the best measure of economy’s standard of living. Because it indicates how much an economy produces on average per person. Real GDP per person = Real GDP/ population. Real GDP per person grows only if real GDP grows faster than the population grows.

13. 13 Preconditions for Economic Growth Dr. Mazharul Islam An incentive system is requires for Economic Growth that created by economic freedom, property rights, and markets. These three also depends on political stability. http://www.youtube.com/watch?v=y8HPZElenO8 http://www.youtube.com/watch?v=RAoMHt28gfMwww.youtube.com/watch?v=RAoMHt28gfM  Economic Freedom refers a condition in which people are able to make personal choices, and they are free to buy and sell in the markets.

14. 14 Preconditions for Economic Growth Dr. Mazharul Islam Property rights refers the social arrangements that rule the protection of private property. Property rights include the rights to physical property, financial property, and intellectual property. Property rights provide the people with the incentive to work & save.  Markets refers a place where buyers and sellers get information and do business with each other, and where market prices send signals to buyers and sellers that create incentive to increase quantities demanded and supplied. Free markets enable people to trade, save, and invest.

15. 15 Preconditions for Economic Growth Dr. Mazharul Islam The previous three conditions (economic freedom, property rights, and markets) work together to create incentives for people to: a.specialize and trade b.save and invest c.expand their human capital, and d.discover and apply new technologies.

16. 16 Policies to achieve Faster Economic Growth Dr. Mazharul Islam To achieve faster economic growth we must increase: 1.The growth rate of capital per hour of labor or 2.The pace of technological change. The main suggestions for achieving these objectives are: a)Encourage (Stimulate) Saving b)Encourage (Stimulate) Research and Development c)Encourage International Trade d)Improve the Quality of Education e)Create incentive mechanisms

17. 17 Encourage (Stimulate) Saving Dr. Mazharul Islam  In general, saving finances investment, which brings capital accumulation. It means that encouraging saving can increase the growth of capital which turn to economic growth. Higher saving rates higher growth rates  One way to increase saving is to make tax incentives. Less tax More saving.

18. 18 Encourage Research and Development Dr. Mazharul Islam  Since technological change is the fruit of research and development (R&D), investment in R&D reflects the economy’s efforts to improve productivity.  Government subsidies and direct funding might stimulate basic research and development.  Private organizations are funding for applied research such as Apple Computer, iPhone, etc.

19. 19 Encourage International Trade Dr. Mazharul Islam  Free international trade stimulates economic growth by extracting all the available gains from specialization and trade.

20. 20 Improve the Quality of Education Dr. Mazharul Islam  By funding basic education and by ensuring high standards in skills such as language, mathematics, and science, governments can contribute enormously to a nation`s growth potential.

21. 21 Create incentive mechanisms Dr. Mazharul Islam  Economic growth occurs when the incentives to save, invest,and innovate are strong enough. These incentives require property rights enforced by a well – functioning legal system.

22. 22 Now it’s over for today. Do you have any question? Dr. Mazharul Islam