MCD 2090 Macroeconomics (week 4)

Tutorial 4: Long-run Economic Growth: Sources and Policies

Period 1
Section A – Homework
1. Why does a country’s economic growth rate matter?

2. Using the per-worker production function show the effect on real GDP per hour worked of
an increase in capital per hour worked, holding technology constant. Now, again using the
per-worker production function graph, show the effect on real GDP per hour worked of an
increase in technology, holding the quantity of capital per hour worked constant.

3. What are the consequences for economic growth of diminishing returns to capital? How
are some economies able to maintain high growth rates despite diminishing returns to capital?

4. What is the new growth theory? How does the new growth theory differ from the growth
theory developed by Robert Solow?

Section B
5. Use the data on real GDP in this table to answer the following questions.

a. Which country experienced the highest rate of economic growth during 2008 (that is, for
which country did real GDP increase the most from 2007 to 2008)?
b. Which country experienced the worst economic recession during 2009? Briefly explain.
c. Which country experienced the highest average annual growth rate between 2008 and
2010?

6. Which of the following will result in a movement along Japan’s per-worker production
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 function, and which will result in a shift of Japan’s per-worker production function? Briefly
explain.
a. Capital per hour worked increases from ¥5 million per hour worked to ¥6 million per hour
worked.
b. The Japanese government doubles its spending on support of university research.
c. A reform of the Japanese school system results in more highly trained Japanese workers.

7. Use the following graph to answer the questions.

a. True or False: The movement from point A to point B shows the effects of technological
change.
b. True or False: The economy can move from point B to point C only if there are no
diminishing returns to capital.
c. True or False: To move from point A to point C the economy must increase the amount of
capital per hour worked and experience technological change.

8. Rea
When answering questions based on articles, please note the following steps;
d the
Step 1: Read all the questions from the article. article
and
Step 2: Number all the paragraphs in the article answer
Step 3: Browse through the article and match the questions and the paragraphs the
following
Step 4: Write the answers to the questions questions
(Do not try to understand each and every word in the article) i. Ac
cording
to the
Solow growth model, what should developing countries focus to increase economic growth?
ii. According to the article, how do you define the technology?
iii. Using production function graphs, analyse the impact of improvement in technology in
agriculture sector and its impact on the Nigeria’s economic growth.
ECONOMY - 19 FEB 2018
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The solution to long-run growth in Nigeria
by Stears Business Limited 2017

Nigerians typically have multiple sources of income. To have a single income source in

Nigeria is to play yourself; never put all your eggs in one basket. Yet, it seems like the only
Nigerian without multiple hustles is Nigeria itself. Oil accounts for about 70% of Nigeria's
federal revenues and 90% of its foreign exchange earnings. No surprise then that the 2014
crash in oil prices triggered a recession, foreign exchange crisis, and higher government
borrowing. Relying on commodities as your primary source of income (known as Dutch
Disease) leaves the country vulnerable. Hence the growth of the diversification rhetoric. The
question is, "What can Nigeria do to diversify its economy and earnings?"
The goal of policymakers should be to drive competitiveness, innovation, growth and
productivity. According to the Solow growth model, arguably the most comprehensive theory
of long-term economic growth, developing countries need to increase their long-term savings
and investment rates. The theory predicts that an increase in the savings rate would lead to
higher economic growth through investment and capital accumulation. Growth and
development require access to substantial long-term savings pools that we may parlay into
investments (new schools, waterways, broadband networks, etc.) that power stronger
growth. A higher savings rate on the national level can be translated into investment in
infrastructure and capital requirements for the growth of several industries. This may be low-
hanging fruit for Nigeria as well since the country has a ridiculously low savings rate. 
 The story doesn't end with savings and capital accumulation, however. The Solow model
makes a bold claim: the only way of sustainably increasing living standards in the long-term
is through continual technological progress. It is impossible for an economy to grow forever
solely by accumulating more capital. While savings and investment help with near-term
growth, the key to sustainable long-term growth is continued technological progress. 
With regards to economic growth and development, we need a more nuanced definition. We
can define technology as the current state of knowledge on how to combine resources to
produce desired products, to solve problems, fulfil needs, or satisfy wants; it includes
technical methods, skills, processes, and techniques. Therefore, both the invention a new
irrigation method and the creation of a more efficient credit process for farmers count as new
technology.  
Developing new technology would provide solutions to Nigeria's most pressing problems like
abysmal health care, weak financial system, education and so on. Technology does this by
improving infrastructure like power supply, creating a conducive business environment and
improving educational systems, unlocking regional manufacturing and trade, and improving
the physical and digital support we need to sustain growth in the long run. Technological
progress increases productivity. For example, mobile banking and cash transfers have
significantly impacted the ease of doing business in Nigeria. Introduction of mobile banking
has reduced transaction time, reduced transaction cost, and increased the number of
transactions conducted. 
The agriculture sector shows us the potential scope for the impact of technology. Zenvus, a
Nigerian precision farming startup measures and analyses soil data like temperature,
nutrients, and vegetative health to help farmers apply the right fertiliser and optimally irrigate
their farms. The process improves farm productivity and reduces input waste by using
analytics to facilitate data-driven farming practices for small-scale farmers. SunCulture,

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which sells drip irrigation kits that use solar energy to pump water from any source, has made
irrigation affordable. Each of these helps Nigeria in the drive for long-term food security. 
Previous paragraphs touched on how technology has improved productivity in agriculture and
financial services, but it applies everywhere. The key is to develop technologies that would
solve uniquely Nigerian problems while producing goods and services for consumption and
trade regardless of industry. These include solutions to health care issues, weak state-run
education systems, broken infrastructure and low productivity in factories.
We need a strong focus on long-run growth.  In addition to focusing on improving industries
and making more money by selling more commodities, there should be a focus on innovating
solutions to people's problems, ensuring income equality and improving the standard of
living. Nigeria has the chance to lead the continent of Africa in the fourth industrial
revolution.

Source: Merlin Uwalaka, Stears Business Limited (2017), ‘the solution to long-run growth in
Nigeriay, 19 February, at < https://www.stearsng.com/article/the-solution-to-long-run-
growth-in-nigeria>, viewed 15 March 2018.

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 Period 2

Section A – Homework
1. Why does the economic growth model predict that poor countries should catch up to rich
countries in income per capita? Have poor countries been catching up to rich countries?

2. What are the main reasons why many poor countries have experienced slow economic
growth?

3. What does globalisation mean? How have developing countries benefited from
globalisation?

4. Briefly describe government policies that can increase economic growth.

Section B
5. Can economists arrive at the conclusion that economic growth will always improve
economic wellbeing? Briefly explain.

6. Why might some people in high-income countries be more concerned with certain
negative consequences of rapid economic growth than people in low-income countries?

7. Rea
When answering questions based on articles, please note the following steps;
d the
Step 1: Read all the questions from the article. article
and
Step 2: Number all the paragraphs in the article
answer
Step 3: Browse through the article and match the questions and the paragraphs the
following
Step 4: Write the answers to the questions questions
iv. (Do not try to understand each and every word in the article) Why has
India
relaxed
the rules governing foreign investment?

v. What are the sectors that will receive approvals for 100 per cent FDI?

vi. How will the increase in capital investments will affect the Indian economy? Explain
using production function graph.

vii. How will technological change will affect Indian economy? Explain using production
function graph.

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The FDI big bang
by Shweta Punj, Sandeep Unnithan & M. G. Arun
INDIA TODAY 23 JUNE 2016

The Narendra Modi government makes its most audacious push for Foreign Direct
Investment. Will it deliver the mega bucks? Union commerce minister Nirmala Sitharaman
rolled out the specifics of the policy; India had flung its doors open wider to foreign
investment. Foreigners could now own airlines, set up food processing firms, defence
manufacturing units and buy pharmaceutical companies.
It was the most assiduous wooing of FDI in the 20 years since the government had first
looked to foreign exchange as a fuel to kickstart the engines of its economy. Six FDI sectors
—pharmaceuticals, food processing, information and broadcasting, air transport, single-brand
retail and defence—saw approvals for 100 per cent FDI.
‘FDI ghar baithe baithe nahin aati (FDI doesn’t come sitting at home),’ Union external affairs
minister Sushma Swaraj told the media in New Delhi on June 19. She was explaining her
government’s massive diplomatic outreach where it hopes to have established contact with all
the countries of the world by the year-end. Swaraj identified the number one objective of this
outreach: to increase FDI in India, the stated aim of various governments since the dawn of
economic liberalisation 25 years ago.
They have tried to attract and promote FDI to supplement domestic capital, technology and
skills to accelerate economic growth, with mixed results. Until 2005, FDI inflows into India
accounted for only 0.8 per cent of the global total. Successive governments, including the
UPA, have adopted the incremental approach to increasing FDI. But under the Modi
government, FDI has been pursued with missionary zeal. In 2015, India attracted $44 billion
in foreign investment, or 2.51 per cent of world FDI flows.
The reasons for the government’s FDI zeal are crisis-driven. The Indian economy faces a
threefold challenge, as pointed out by a World Bank Study—India Development Update—
released on June 20. India, the report says, needs to activate its stalled engines—agricultural
growth and rural demand; trade; and private investment—while ensuring that the active
engines, pickup in industrial activity and the services sector do not run out of fuel. From a
peak of 24 per cent in 2009–10, gross capital formation grew at zero per cent last year. With
private investment depressed, the government is turning to the world for investment.
Easing FDI across sectors and placing most sectors on the automatic route, it essentially
means investors can skip the layers of India’s notoriously tardy bureaucracy if they want to
invest in the country. It is targeted towards implementing the government’s promise of
improving the ease of doing business in India, apart from giving infrastructure and rural
economy a push.
‘The decision is to encourage investment which will lead to job creation,’ says Shaktikanta
Das, secretary, Department of Economic Affairs. ‘This is in sync with the government’s
philosophy of minimum government and maximum governance.’
INDIA TODAY
Source: Shweta Punj, Sandeep Unnithan, & M. G. Arun, (2016), ‘The FDI big bang’, India
Today, 23 June, at <www.indiatoday.intoday.in>, viewed 8 November 2016.

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 8. Complete Post-class homework after watching the video.

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