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