Chapter 7:Economic Growth and Development

7.1 Defining Economic Growth

• A country’s standard of living depends on its ability to produce goods and services.

• In Canada, over the past century, average income as measured by real GDP per person has grown by about 2 percent per year.

• Economic growth: increases in per-capita real GDP. This is measured by the rate of change in per-capita real GDP per year.

Problems with defining Economic Growth

• In Canada, over the past century, average income per capita has grown by about 2 percent per year – relatively high standard of living

• BUT, who enjoys this wealth? Must pin-point.Eg. Alberta vs. Newfoundland• UN Human Development Index takes into

account: education & life expectancy measures HOW the income is spent.

7.2 Modeling Economic Growth

• Productivity refers to the amount of goods and services (GDP) produced for each hour of a worker’s time. Being productive means producing the same output with fewer labour hours eg. 2 hours per typed essay, total of 10

• Productivity = GDP / # workers or labour hours• Relationship between economic growth and

increases in productivity

Modeling Economic Growth

• Productivity = GDP / # workers or labour hours

• Relationship between economic growth and increases in productivity

Productivity: it’s role and determinants

• Productivity plays a key role in determining living standards for all nations in the world.

Productivity: it’s role and determinants Is Determined

• The inputs used to produce goods and services are called the factors of production.

• The factors of production can increase the productivity of labour.

How ProductivThe Factors of Productioned

– Labour– Technological knowledge– Physical capital (robots, plants, machinery)

How ProducThe Factors of Productioned ivity Is Determined G^&• Labour

– the economist’s term for the workers used for production of G&S

• Like physical capital, increases in labour raises a nation’s ability to produce goods and services

How ProducThe Factors of Productioned ivity Is Determined G^&• Labour

• a) increases in labour supply leads to real wage fall. • b) more workers means more can be produced• c) greater output is possible

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Number Employed

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b) c) Real GDP

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How Productivity Is Determined• Technological Knowledge

– society’s understanding of the best ways to produce goods and services.– a) improvement in technology increases productivity and shifts curve up– b) increase in productivity means increase in demand for labour at

higher wages rates– c) real GDP increases

ProducThe Factors of Productioned

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a) Labour Market

PF1

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Real GDP/ Year

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Number Employed

D2

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HThe Factors of Productione

• Physical Capital– is the stock of equipment and structures that are

used to produce goods and services.• Tools used to build or repair automobiles.• Tools used to build furniture.• Office buildings, schools, etc.

7.3 Fundamental Determinants of Economic Growth

• How much you save!– if you want more tomorrow you have to have less

today. • Eg in desert with one bottle of water… • What is saved today will be invested in physical and

human capital used for growth• Higher saving means higher GDP and higher standard

of living

Other Determinants of Economic Growth

• Property Rights and Entrepreneurship– Can’t be scared of the government

• The more your property rights are protected more saving, investment, business

• What is saved today will be invested in physical and human capital used for growth

• Higher saving means higher GDP and higher standard of living

Other Determinants of Economic Growth

• Market driven economies• Political stability• Population growth

– Increase in labour supply

• and immigration– Higher employment rates

7.4 New Growth Theory and What Determines Growth

• Technology is an important factor of economic growth

• NGT suggests that new technology can be encouraged by incentives

• The greater the rewards (incentives), the greater the improvements to technology

New Growth Theory and What Determines Growth

Technological Aspects:•R&D

– Development of specific new products, machines, materials that are protected by patents

– Patents protect new techniques, ideas from being copied

• Right to make, use, make, sell an invention for a period

•R&D from one country benefits those in less developed countries eg. robots developed in America go to Mexico to build cars

New Growth Theory and What Determines Growth

• The Role of Government in encouraging growth– Help through policies

• Support free markets ie. Make easier to buy and sell• Protect property rights• Maintain political stability• Controlling immigration• Subsidize eg education• Invest in roads eg. use to get to work to produce things• Encourage savings through RRSP, science tax breaks• Transfers to start-up companies

7.5 The Costs and Benefits of Economic Growth

• Costs – a growing economy means increased consumption

• Environmental Disasters– More consumption of earths natural resources– More pollution

• Uneven Consumption– Western Countries demand for beef leads to rainforest

destruction

The Costs and Benefits of Economic Growth

• Costs – a growing economy means increased consumption

• Poverty Leads to Environmental Pressure– Need to consume to grow and lift their people out of poverty

» Have largest populations

• Brundtland Commission– “Sustainable Development”– Meet present and future needs

The Costs and Benefits of Economic Growth

• Benefits – a growing economy means increased consumption

• Higher Standard of Living– Greater economic growth means more spending on education

and healthcare, other social programmes

• Less Population Growth– More educated women, more working, less time for babies

• New Technology Solves Problems– Depleting oil reserves led to new extraction methods

7.6 International Economic Development

• Qst. How did Canada go from being poor to rich?

–Ansr. Development Economics: why some countries grow

• World Poverty– Half to two-thirds of world population live at

subsistence levels

International Economic Development

• Qst. How did Canada go from being poor to rich?

–Ansr. Development Economics: why some countries grow

• World Poverty– Half to two-thirds of world population live at

subsistence levels– What is poor in Canada is rich in other countries

International Economic Development

• Development Economics: how & why some countries grow

• Population growth and economic development– Poor countries’ population growing faster than

rich

International Economic Development

• High population growth threatens economic development and quality of life

• Malthus prediction: population will outstrip food supplies– Wrong. As population grows, so does food supply

• Price of food also dropping• Growth leads to smaller families

– Lower child mortality, less kids– Move out of farming to cities, need less kids– Make more money to support higher standard of living

• Send kids to $$$chool

International Economic Development

• The Stages of Economic Development: Agricultural to Industry

• Agricultural (Congo) > Manufacturing (China) > Services (Canada)

International Economic Development

• Four Factors in Economic Development– An Educated Population

• Idea generation, produce efficiently and more– Property Rights

• Leads to more investment and entrepreneurship– Creative Destruction: new businesses create new jobs,

& industries while destroying old ones eg. Ford cars replaced horse and carriage makers

– Limit Protectionism• Open economies grow faster

– eg. China used to only produce for it’s own people and not trade ie. Protected from outside products