5.3 economic growth

Savings rate

The proportion of disposable income that is saved

How does an economy grow?

an increase in capital deepening a higher savings rate a population that grows along with capital growth government intervention technological progress

Capital deepening explanation

A nation with a large amount of physical capital will experience economic growth -capital deepening is one of the most important sources of growth in modern economies

Tech progress explained cont.

Causes of tech progress include: scientific research, innovation, new products increase output and boost GDP and profits, scale of the market, larger markets provide more incentives for innovation, education and experience, increase human capital, natural resources, increased natural resources can create a need for new technology

Government

-if the gov. raises taxes, households will have less money, people will reduce saving, thus reducing the money available to businesses for investment -however if gov. invests the extra tax revenues in public goods, like infrastructure, this will increase investment, resulting in capital deepening

Technological progress

An increase in efficiency gained by producing more output without using more inputs

GDP and quality of life

GDP measures the standard of living but it cannot be used to measure peoples quality of life -in addition GDP tells us nothing about how output is distributed across the population -while GDP per capita tells us little about individuals it does give us a starting point for measuring a nations quality of life, in general high GDP=greater quality of life

Saving and investment

If the amount of money people save increases, then more investment funds are available to businesses These funds can then be used for capital investment and expand the stock of capital in the business sector

Population growth

If the population grows while the supply of capital remains constant, the amount of capital per worker will shrink, which is the opposite of capital deepening (this process leads to low standards of living) -a nation with low population growth and expanding capital shock will experience significant capital deepening

Technological progress explained

It is a key source of economic growth, it can result from new scientific knowledge, new inventions, and new production methods -measuring technological progress can be done by determining how much growth in output comes from increases in capital and how much comes from increases in labor -any remaining growth in output must come from technological progress

Measuring economic growth

The basic measure of a nation's economic growth rate is the percentage of change in real GDP over a period of time economists prefer a measuring system that takes population growth into account. For this they rely on real GDP per capita

Foreign trade

foreign trade can result in a trade deficit, a situation in which the value of goods a country imports is higher than the value of goods it exports -if these imports consist of investment goods, running a trade deficit can foster capital deepening -when the funds are used for long term investment, capital deepening can offset the negatives of a trade deficit by helping generate economic growth, helping a country pay back the money it borrowed in the first place

Saving

income not used for consumption

Capital deepening

the process of increasing the amount of capital per worker

Real GDP per capita

real GDP divided by the total population of a country