Economic growth is n n Often measured by
Economic growth is n n Often measured by the rate of change of real GDP q although this has many deficiencies q it omits output that is not bought/sold n e. g. leisure, pollution, congestion q it also neglects income distribution so higher GDP per capita does not necessarily mean greater happiness q but it helps.
The production function. . . n shows the maximum output that can be produced using specified quantities of inputs, given existing technical knowledge Output = f(capital, labour, land, raw materials, technology) n This is to be read as: output is a function of capital, labour, etc.
Increasing output n n n Capital q output per worker may increase with capital per worker Labour q population growth q participation rates q human capital Land q fixed supply, but quality may be improved
Increasing output (2) n n n Raw materials q important distinction between n depletable resources (coal, oil) n renewable resources (timber, fish) Technical knowledge q inventions, R&D Economies of scale may reinforce the long -run growth process
Technical knowledge n n The state of technical knowledge changes through time because of: q inventions q embodiment of knowledge in capital q learning by doing Research and development (R&D) q patent systems address a market failure which otherwise would lead to there being too little R&D.
The convergence hypothesis n n … asserts that poor countries will grow more quickly than average, but rich countries will grow more slowly than average. q i. e. poor countries should ‘catch up’ but social and political differences may enable some economies to catch up more effectively than others.
Endogenous growth theory n … recognises that there may be significant externalities to capital n Higher capital in one firm increases productivity in other firms. n known as ‘endogenous’ growth theory because it suggests that growth may depend on parameters that can be influenced by private behaviour or public policy q governments should subsidise human and physical capital formation
The costs of economic growth n n n Malthus, in the 18 th century, warned of limits to growth q but he underestimated the potential impact of technical change The price system helps to ensure a proper use of finite resources Growth may bring costs q pollution, congestion, poor quality of life But lack of growth may impose costs also The assessment of the desirable growth rate remains a normative issue
Zero growth? n The zero-growth proposal argues that, because higher measured GNP imposes environmental costs, it is best to aim for zero growth of measured GNP. n This fails to distinguish between measured outputs accompanied by social costs and measured outputs without additional social costs. It does not provide the correct incentives. n when there is too much pollution, congestion, environmental damage or stress, the best solution is to provide incentives that directly reduce these phenomena.
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