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