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Week 3: Ch6- LR Eco Growth - Coggle Diagram
Week 3: Ch6- LR Eco Growth
LO#2: What determines how fast economies grow
2.1 Sources of Tech Change
Labour Productivity (changes in real GDP per capita
Technological Change
Improvements in machinery & equipment
Increase in human capital
better means of organising & managing production
Changes in quantity of capital per hour worked
Production Function (PF)
2.2 The per-worker production function (PF)
Diminishing Returns
Increase in K/L also increase Y/L but @ a diminishing rate
i.e: each additional $10,000 increase in K/L results in progressively smaller increases in Y/L
Variable in the model
L= labour
K=capital
Y/L= Real GDP per hour worked
K/L= Capital per hour worked
Illustrates: relationship between real GDP/hr worked & capital/hr worked, holding the level of technology constant
2.3 Tech Change: key to sustaining eco growth
helps sustain K/L while increases in Y/L avoids diminishing returns
shifts the PF & allows more Y/L with same amount of K/L
In the LR, a country's SoL will or can only rise if it experiences continuing tech change
2.4 Growth Theories
New Growth Theory/Endogenous Growth (Paul Romer)
Accumulation of knowledge capital is key for eco growth
done through R&D
Knowledge capital is non-rival & non-exludable, thus 'free rider' on R&D occurs
gov policy can intervene
Patents & Copyrights
Subsidising R&D (tax benefits to firms that invest in R&D)
Subsidising education (increase the number of worker w/ knowledge capital
Creative Destruction (Joseph Schumpeter)
Rising living standards and the entrepreneur is key for eco growth
through products that meet consumer wants in qualitatively better ways
NOT through small changes to existing products
LO#3: Why poor countries don't exprience eco growth
3.1Why don't more low-income countries experience rapid growth?
Failure to enforce the rule of law
Property Rights
legal right to individuals/businesses to buy or sell
Rule of law
gov to enforce laws to protect private property & enforcing contracts
Wars & Revolutions
period of violent changes of gov
Poor public education & health
weak public school systems
unaffordable or poor quality health care
people who are sick work less and are less productive
Slow technological development
gain access to tech is through foreign direct investment
foreign firms are allowed to build new facilities or to buy domestic firms
Gov policies can aid growth of tech by subsiding R&D
Low rates of saving & investment
Tax incentives can lead to increase savings
i.e: supperannuation
Investment tax credits
i.e gov provides incentives for firms to engage in investment
3.2 The benefits of globalisation
Foreign Investment
Foreign Direct Investment (FDI)
occurs when corporations build or purchase facilities
i.e: factories in foreign countries
Foreign Portfolio Investment (FPI)
occurs when an individual or firm buys financial securities
i.e: shares/bonds issued in another country
FDI & FPI can give a low-income country access to funds & technology
Globalisation
Interaction & Integration between buss/govs/individuals of different countries & become open to FI & International trade
Made possible through reducing tariff barriers
Eco growth is strongly positively associated with globalisation
benefits developing countries by making it easier for them to get investment funds & technology
Disadvantages
exploitation
i.e low wages, safety regulations
environmental problem
i.e global warming
undermines distinctive cultures
LO#1: Global Trends in eco Growth
1.1 Eco Growth Overtime
Main Factors for significant eco growth
Agricultural revolution
The rise of the factory and mechanical power
New Technology
Why do growth rates matter?
Raises living standards
economies with low or no eco growth suffer from:
starvation/disease
low healthcare
poor education
Group of Economies
High Income countries (industrialised)
USA
Japan
AUS
Developing Countries (poor countries)
Asia
Africa
America
Newly Industrialised Countries
China
India
Malaysia