Unit 6 Notes

Notes (4/6/15)

Economic Growth Defined:

• Sustained increase in Real GDP over time
• Sustained increase in  Real GDP per capita over time

Why Grow?

• Growth leads to greater prosperity for society
• Lessens burden of scarcity 
• Increase general level of well being

Conditions for Growth:

• Rule of Law
• Sound legal and economic institutions
• Economic freedom 
• Respect private property 
• Political and economic stability (low inflationary expectations)
• Willingness to sacrifice current consumption in order to grow
• Saving 
• Trade

Physical Growth:

• Tools; machinery, factories, infrastructure 
• Physical capital is product of investment 
• Investment = sensitive to interest rates and expected rates of return 
• Takes capital to make capital 
• Capital must be maintained 

Technology and Productivity:

• Research and development, innovation and invention yield increase in available technology
• More technology on hands = increase productivity 
• Productivity is output per worker
• More productivity = more economic growth 

Human Capital:

• People are counting most important resource, therefore human capital must be developed 
• Education
• Economic freedom 
• Right to acquire private property
• Incentive
• Clean water 
• Stable food supply
• Access to technology 

Economic Growth Illustrated: 

Hindrances to Growth:

• Economic and political instability (high inflationary expectations) 
• Absence of the rule of law
• Diminished Private Property Rights 
• Negative Incentives (the welfare state) 
• Lack of savings 
• Excess current consumption 
• Failure to maintain existing capital 
• Crowding Out of Investment (Government deficits and debt increasing long term interest rates)
• Increase income inequality = populist policies 
• Restrictions on Free International Trade