economic essay

SESSION 3 11TH JANUARY 20

INTRODUCTION TO

ECONOMIC GROWTH

SOMASRI MUKHOPADHYAY

• Economies Vary in size • Wide disparity • Growth Rate Vs Economy Size – What Can We Infer? • What Can We Infer about the Underlying Factors?

So……Summing Up

13-Jan-17 2

Economic Conditions of the Time

Economic Growth Theories

Economic Growth Theories……

18th -19th Century

Eve / During the Industrial Revolution

Investigation of Growth Factors vis-vis the emergence of “Industrial Capitalism”

Adam smith, Robert Malthus and David Ricardo

The Classical Economists and Economic Growth*

Possibilities of Progress

*Reference: Harris. D,J,. The Classical theory of Economic Growth http://web.stanford.edu/~dharris/papers/The%20Classical%20Theory%20of%20Economic%20Growth %20%5Bpre-print%5D.pdf

GDP Per-Capita - 1700

Source: www.ourworldindata.org/data/growth-and-distribution-of-prosperity/gdp-growth-over-the-last-2000-yearsData source: Angus Maddison Historical Statistics

Red areas are Economies Having Per-Capita GDP less Below 1000 Orange = 1000-1999 1990 International Geary-Khamis dollars

GDP Per-Capita 1870

Red areas are Economies Having Per-Capita GDP less Below 1000 Orange = 1000-1999 Light Orange = 2000-3999 1990 International Geary-Khamis dollars

GDP Per-Capita - 1820

Source: www.ourworldindata.org/data/growth-and-distribution-of-prosperity/gdp-growth-over-the-last-2000-yearsData source: Angus Maddison Historical Statistics

Input Output Calculation

Surplus Product =

Gross Output – (Seed + Necessary Consumption + Other Inputs)

In Terms of Barley

Even Older Times Brick Plates of Mesopotamia*

Note: *Source: Kurz. H,D and Salvadori. N,. Theories of Economic Growth – Old and New.

Surplus Rate = Surplus/Necessary

Input

The Step towards

Rate of Growth

Progress

Smith’s Attack against Mercantilism

Malthus’s Concern with Population Growth

Ricardo’s Campaign Against Corn Law

Classical Economic Growth Model

Surplus Rate = Surplus/Necessary

Input

To Produce, an Economy Requires

Labour, Natural Resources and

Produced Means of Production

Progress / Increase of National Wealth

Free Market

Capital Accumulation and Division of Labour

An Endogenous Process

Adam Smith* (1723 – 1790) and Economic Growth

*An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

The Production Function: Y = f(K, L, N) Where

– K= Capital – L= Labour – N = Land

• Production function Reveals Increasing Returns to Scale

Adam Smith Three Major sources of Growth • Increased Labour Force and

Capital Stock • Improvement in the

efficiency with which Capital is used in Labour ….. Through

• Division of Labour • Technological Progress

• Improved and Increased Foreign Trade

Less Regulation

• Increased Foreign Market Access • Improved Sector allocation • Improved Efficiency of Domestic Market Operation

Optimal Allocation of Resources

• Labour Redistribution • Higher Division of Labour from Expanded Market

Adam Smith

Availability of Capital

Technological Progress

Coming Back to the Three Major sources of Economic Growth 1. Growing Labour Force and Capita Stock 2. Improved efficiency of capital Usage in labour through

1. greater division of labour and 2. technological progress

3. Increased Foreign Trade resulting in reinforcing the other two sources of growth.

Adam Smith

Rise in 1.Income Level 2.Capital stock

1.Increased Investment 2. Decreased Incremental Capital Output Ratio

Stationary State of the Economy

Adam Smith – The Growth Process

• Unchanged Population • Constant Income

• Subsistence Wages • Complete Elimination of

Profit • Absence of Net Investment

Growth of the Economy and Population

Lack of Wealth is a constraint on Population Growth

Effective Demand is the main Factor Underlying growth of the Economy

Thomas Malthus (1766-1834) and Economic Growth

Growth of the Economy vis-à- vis Growth of

Population

• Y = R+W………(1) – Y = National Income – R = Profit – W = Wages

Thus……. • R = Y – W…….(1a) Breaking Down • R = (CC+CS+CW) – CW

= CC+CS……..(1b)

Thomas Malthus Workers Earn subsistence Wage Consume what they Earn

• CW = Workers Income

Capitalist Earns more than they consume Save a Part of their Earning

• CC + CS = Capitalist Consumption + Capitalist Saving = Capitalist Income

• CS = I Growth Enhancing • CS ≠ I Growth Retarding

Incentive to work More

Inability of an Economy to Transform into an Industrialised Economy

Not Rapid Enough Technological Progress

Interdependence of the two domestic sectors

Thomas Malthus…..Growth Retarding Factors

The Production Function: Y = f(K, L, N, S) Where

– K= Capital – L= Labour – N = Land – S = Technical Know-how

David Ricardo (1772 – 1823) and Economic Growth

Ricardo Vis-a-Vis Smith • Diminishing Marginal Productivity as against

Increasing Returns to Scale • Marginal Productivity of all factors diminish in

the absence of technology progress • In agriculture – Introduction of Technology

Delays the Decrease in Marginal Productivity of Land

• In Industry Introduction of New Technology results towards Increasing Returns.

Overall Growth Depends on • Which Outweighs the Other

• Supply of Land fixed • Land Implies the Original Physical ResourceLand

• Natural Wage and Real Wage • Population growth based on wages –

• Market Wage >Natural Wage • An Upper Limit to Population Growth

Labour/ Human Resource

• Both Fixed and Circulating Capital • Circulating Capital determines the increase in demand for

labour

Capital Accumulation

Ricardo’s Views about the Factors of Production Market Forces Play in Labour Market to

Determine Population

Rate of Capital Accumulation

Depends on Saving, In-turn Depends on

Net Income

• People’s willingness to save diminishes with increase in Profit • Capital Accumulation = f(Excess Profit) • Will Fall if

• Surplus Falls • Rate of Profit falls to a level enough to cover risk

People’s willingness to save diminishes

with increase in Profit

Surplus Leftover after Paying subsistence Wage to Labour • Profit

Rate of Profit Linked with subsistence Wage

• Inversely Related

Rate of Profit Falls Capital Accumulation Decrease

Pressure of Increased Population Margin for Profit almost Zero

• Stationary Point in Growth Process

Ricardo –Process of Capital Accumulation

Stationary State Not Reached in a Sustained Manner

Short Term Interruptions

Stationary State

Ricardo – Dynamic Process of Growth

Explained Growth In Terms of Capital Accumulation, Technological Progress and Population

Opined Minimum Government Intervention

Economy Entering into Stationary State

Classical View of Economic Growth Summarised