economic essay

SESSION 4 16TH JANUARY 20

INTRODUCTION TO

ECONOMIC GROWTH

SOMASRI MUKHOPADHYAY

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

• Increase in Investment

Increased Profit

• Increased Capital Accumulation

• Improved Technology

Investment • Increased Wage

fund

Increased Capital Accu,ulation

•Population Increases

Increased Wage •Increased Cost of Factors of Production

Food Production Increased

• Stationary State Sets in

Decreased Profit

The Growth Process

• Y = L+K+N+TThe Production Function

• T = f(I)Technological Progress (T) is Dependent on Investment Made (Capital Accumulation)

• I = ∆K = f(R)Capital Accumulation / Investment Depends on Profit

• R = f(L,T)Profit Depends on Supply of Labour and Technology

• L = f(W)The Size of the Labour force Depends on Wage Fund

•W = f(I)Size of the Labour Force Depends on Level of Investment

• Q = R+WThe Missing Equation

Classical Growth Theory The Propositions

Y=Output L=Labour K=Capital T=Technology R= Profit W= Wage Fund I= Level of Investment/Capital Accumulation

Change in Profit

Change in Labour

Change in Capital

Change in Technology Change in

Wage

Change in Labour

Classical Growth Theory The Circulatory System

End of Development Activity

Or The Stationary State

Two Points to Note 1. Strong Relationship Between

Performance of the Agricultural Sector and Industrial Growth

2. Brings out the Key Variables of Economic Growth and their

Interdependence

The Changing State of the Economies

The graph was created from a research letter by JP Morgan Chairman of Market and Investment Strategy Michael Cembalest and shows GDP growth since 1 AD

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

The 1930s………

The Great Depression of

the 1930s

“Economic Possibilities of our Grand Children”

J.M.Keynes 1930

Reference: http://www.gutenberg.ca/ebooks/keynes- essaysinpersuasion/keynes-essaysinpersuasion-00-h.html

Red areas are Economies Having Per-Capita GDP less Below 1000 Orange = 1000-1999 Light Orange = 2000-3999 Crème = 4000-5999 Light Crème = 6000-9999 1990 International Geary-Khamis dollars

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

GDP Per-Capita - 1913 GDP Per-Capita - 1950

Keynes On Economic Growth

Government Intervention

To Rescue

Economy

Existing Economic Theory Failed to Explain the Causes and Provide a Policy

Opined Against the Free Market Theory

Free Market has no Self-Balancing Mechanism Leading to Full Employment

Aggregate Demand (Spending by Government, Household and Business)

Opined Government Intervention Through Public Policy and attain Full Employment and Market Stability

Keynesian View in Short

Great Depression Unemployment

Early Post Keynesian Model of Growth

Explain Growth in terms of the Level of Saving and Productivity of Capital

No Natural Reason for an Economy to have Balanced Growth

Dynamic Extension of the Keynesian Doctrine

Post Keynesian Era - Harrod-Domer Model (1946)

Warranted Rate of Growth

• Rate of Growth at which the Economy Does not Expand Indefinitely or Go into Recession

Actual Rate of Growth

• Real Rate of Increase in the Economy’s GDP

Natural Rate of Growth

• Rate of Growth Required to Maintain Full Employment

Growth and Harrod-Domer Model

• Growth Depends on the Quantity of Labour and Capital • Increased Investment Leads to Capital Accumulation In-turn

Leading to Economic growth. • More Appropriate in terms of Less Economically Developed

Economies – Labour Supply is High – Low Physical Capital

• LDCs – Insufficient High Income to Enable sufficient Savings, thereby leading to low investment

• Economic Growth is dependent on Policies to – Increase Investment – Increase Savings – Efficient Use of the Investment through Technology Progress

Harrod- Domer Model

A Model Formulated to Explain Business Cycles Adapted to Explain Economic Growth

Basic Solow Model

Technology and Solow Model

Human Capital in Solow Model

THE NEOCLASSICAL GROWTH MODEL THE SOLOW MODEL (1956)

Inclusion of Labour as a factor of Production

Capital-Output Ration not Constant / Fixed

The Solow Model – Basic Model

Short Run Growth – Determined by Moving to a new Steady

State

Change in Capital Investment, Labour Force

and Depreciation Rate

Change in Capital Investments Result from the

Change in Savings Rate

Long Run

Growth is Achieved through Technological

Progress

Long Run Inclusion of Technology in Basic Solow Model

Solow Romer Model

Extension/ Improvement Over Harrod-Domer

Model

Assignment 1……Class Discussion