ECON10003 Lecture Notes - Lecture 16: Potential Output, Capital Accumulation, Employment-To-Population Ratio
19 Jun 2018
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MACROECONOMICS LECTURE 16
An introduction to Economic Growth
What causes potential output to increase over time?
Economic growth: represented by the increase in potential output over time. Concern arises with whether y* is larger
in successive years and by how much. It is measured using real GDP per head of population and rate of growth of
real GDP per head.
Power of compound interest: there is significance in small differences in annual rates of growth to the overall
growth in living standards, which may generate large differences in living standards in the future.
Labour Productivity: allow y = real GDP and y/pop = real GDP per head of population.
Where N is the number of persons employed. Output per head of population is equal to the product of labour
productivity Or avg. product of labour (y/N), and the proportion of the population that is employed (N/pop). Output
per head of the population can only grow if:
1. There is an increase in labour productivity; or
2. There is an increase in the proportion of the population that is employed.
Employment rate: depends on labour force participation rate and the unemployment rate ( proportion of labour force
which have employment vs those unemployed). This can increase due to rise in participation rate and/or fall in
unemployment rate. Unemployment rate will be subject to cyclical fluctuations, but long term cannot fall below zero.
Long term growth in output per head of population requires growth in labour productivity.
Determinants of labour productivity:
-The capital stock- physical capital
More buildings and P/E to work with. Beware of diminishing returns i.e where capital is already
greater, labour productivity will be higher, but the ability to increase labour productivity from further
capital accumulation will be limited.
-Human Capital:
The education and training and the resulting skills which are embodied in the labour force. Deciding if
the cost of education is worth the benefits.
-Land and natural resources
An abundance of high quality natural resources increases the productivity of the workers who use
them
-Technology
Ability to develop new technology will influence labour productivity
-Entrepreneurship and management
Necessary for introduction of new products, services, technological processes and production methods
-Political and legal environment
Encourages economically productive behaviour. Hard work, saving and investing habits. Provide
goods and services to the public.
Productivity slowdown: possible reasons could include the quality of public education, difficulty in measuring
productivity improvements in service industries.
Costs of growth:
1. The savings necessary to allow for capital accumulation. Lower consumption now for higher future consumption.
2. Historically countries that have experienced growth and industrialisation have at the beginning of the process been
associated with exploitation of labour.
3. Consideration of the impact that growth has on the environment through depletion of natural resources and
emissions of a range of pollutants.
Kuznets environmental curve argues that the relationship between per capita income and the use of natural resources
and the emissions of pollutants has an inverted u shape. With damage to environment on the y axis and per capita
along x. There is a natural progression of economic development from clean agrarian economies to the polluting
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