Patterns & Theories of Economic Growth:

Economic growth represents the expansion of countrys potential GDP or national output. Equally important is the concept of per capita growth output per person.

Principal Questions:
(a) What are the major forces behind this growth?
(b) What can nations do to speed up their

economic growth rate?

(c) What are the long term patterns of

economic countries.

growth

in

high

income

Four wheels of growth

Human Resources Size of Labour Force & Quality of worker. Natural Resource Energy sources, water, soil & forest. Capital Formation Infrastructure. Technological Change Scientific knowledge. Equipment and &

Innovation:

Limits to growth:
Economic growth is limited due to the
(a) Finiteness of our natural resources

(b) Environmental Constraints

Malthusian Growth Model:

As the economic growth continues, all the land will be occupied. Output grows but not as fast as population.

Iron Law of WagesOnly at a subsistence wages could there be a stable equilibrium.

Neo-Classical Growth Model:

Malthus could not recognize that technological innovation and capital investment could overcome the law of Demising Returns.

Solows growth model constitutes a framework within which modern macro economic theory can structured. According to Solow capital accumulation and new technologies are the key determinants of economic growth.

Capital consists of durable produced goods like buildings, factories, equipment, tools, inventories of finished goods etc.

Q = f (K,L) Where K= Capital Goods L= Number of workers K/L = Quantity of Capital per worker Capital deepening is the process by which the quantity of capital per worker increases over time.

Relationship between capital deepening and Rate of Return on Investment.

Rapid Rate of Investment tends to depress the rate of return on capital because of fall of in productivity in capital.

Side by side, wage rate paid to workers will tend to rise as capital deepening takes place. Why? Each worker has more capital to work with and his marginal product therefore rises. As a result, competitive wage rate rises along with the marginal product of labour.

Capital deepening occurs when the stock of capital grows more rapidly than the labour force. This results in diminishing return on capital.
Assumption is that other factors such as technology, quality of labour force and natural resources are constant.

Steady state of Growth

In the long run, according to Solow model, the economy will enter a steady state in which capital deepening ceases, real wages stop growing and capital returns and real interest rate are constant.

Without out technological change, output per worker and wage rate stagnate.

Theory of Technological Change

As a result of improvements in technology, the aggregate production function shifts upward over time.
Technology is promoted by market forces, public policy decisions and emergence of new institutions.

The most important feature of technological change (or technologies) is that they can be used by many people at the same time without being used up. A new software, a new miracle drug can be used through out the worked without reducing its productivity for any one.

Lesson:
If technological differences are the major reasons for differences in living standards among nations then economic growth policy will have to focus sharply on how nations can improve their technological performances. Technological advancement is crucial to the growth of nations.