ECONOMİC GROWTH

ECONOMİC GROWTH

Growth = Annual Growth Rate of p c Income, GDP

Growth Rates across the world 65 – 95:“spectaculat”: China (8.2 %)“very good”: East Asia (5.5 %)“decent”: South East Asia“bad”: Latin America“very bad”: Sub Saharan Africa

MODERN ECONOMİC GROWTH : BASİC FEATURES Today a growth rate of 2% is no surprise! Leaders over past four centuries:

1580 – 1820: Netherlands 0.2% (real p c GDP growth),

1820 – 1890: U.K. 1.2 % (annual growth of GDP), 1890 – 1989: U. S. 2.2 % (average annual growth

rate). With a 2% rate, nation’s pc GDP doubles in

35 years => shorter than a life span!

THEORİES OF ECONOMİC GROWTH

Economic growth is the result of abstention from current consumption.

Economy produces variety of products => production generates income => Income buys these commodities produced (depending on distribution of income and preferences).

CİRCULAR FLOW OF ECONOMİC ACTİVİTY

Firms

Households

Consumption Expenditure

Wages, Profits, Rents

outflow

inflow outflow

inflowinvestment

savings

TWO GROUPS OF COMMODİTİES

Consumption Goods: Produced for the purpose of satisfying human needs and preferences => Households buy

Capital Goods: Produced for the purpose of producing other commodities => Firms buy

SAVİNG - INVESTMENT

If all income is paid out to households, and if households spend their income on consumption goods, where doest the market for capital goods come from? Households save, by abstaining from current

consumption, households make available pool of loanable funds that firms use to buy capital goods.

Buying power is channeled from savers to investors through banks, individual loans, governments, and stock markets.

STARTİNG POİNT OF ALL OF THE THEORY OF ECONOMİC GROWTH:

Without the initial availability of savings, it would not be possible to invest and there would be no expansion!

Macroeconomic Balance: Investment Demand = Savings Leakage

SAVİNG & INVESTMENT Households’ Choice

Households receive income Y, can either save or consume, i.e.

Y = C + S Firms’ Choice

Firms produce a set of goods worth Y, these are either investment or consumption goods, i.e.

Y = C + I Households and Firms in a Closed Economy

In a closed economy, the value of savings equals the value of investment

Y = C + I Y = C + S => S = I

KEY DEFINITION: INVESTMENT

Investment: Change in Capital Stock I(t)= K(t) – K(t-1)

Intangible vs. Tangible objects that contributes to increased production.

Human Capital: Act of training and education

Change in Capital Stock occurs because of : Deliberate actions of firms, i.e. Purchase of new capital

goods, sale of old capital goods Depreciation, i.e. Natural wear and tear

Economic Growth is positive when investment exceeds the amount necessary to replace depreciated capital, thereby allowing the next period’s cycle to recur on a larger scale => Economy expands!

THE HARROD – DOMAR MODEL -1-

THE HARROD – DOMAR MODEL -2-

THE HARROD – DOMAR MODEL -3-

Recipe:

Growth pc = (savings rate/ capital output ratio) - population growth rate -

depreciation

THE HARROD – DOMAR MODEL -4-