Textbook Notes (369,097)
Canada (162,378)
ECON 295 (70)
Chapter

Econ 295 - Readings 26-29

34 Pages
167 Views

Department
Economics (Arts)
Course Code
ECON 295
Professor
Christopher Ragan

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270312 209 PM 261NatureofEconomicGrowthThreevariablesobservedforEconomicGrowth RealGDPo Goodmeasureifamountofannualeconomicactivityo Notagoodmeasureofaveragemateriallivingstandardsbecausedoesnttakeintoaccountthegrowthinthepopulation RealGDPperCapitao Increasesduetoproductivity RealGDPperemployedworkerEconomicGrowthsustainedorlongrunincreasesinrealGDPBenefitsofEconomicGrowthRisingAverageMaterialLivingStandards Increasesinincomeleadtochangesinpatternofconsumption Shiftsfromtangiblegoodstowardserviceso Servicesaccountfor70ofCanadianconsumptionMuchlowerinlesserdevelopedcountries Environmentalprotectiono LesserdevelopedcountriesdonothavetheluxuryofbeingconcernedaboutenvironmentaldegradationastheysometimeslacktheprovisionofbasicrequirementsoflifeAlleviationofPoverty Noteveryonebenefitsequallyfromgrowth Redistributionpoliciesareneeded RapidgrowthmakesthealleviationofpovertyeasierpoliticallyCostsofEconomicGrowth WearecaughtupinaneverendingsearchformoreTheOpportunityCostofEconomicGrowthEconomicgrowthwhichpromisesmoregoodsandservicestomorrowisachievedbyconsumingfewergoodstodayFortheeconomyasawholethissacrificeofcurrentconsumptionistheprimarycostofgrowth TransferringresourcesfromconsumptiontoinvestmentlowerscurrentconsumptionbutraisesgrowthandthereforefutureconsumptionSocialCostsofEconomicGrowthExistingfirmsareovertakenandmadeobsoletebynewfirmsoldproductsaremadeobsoletebynewproductsandexistingskillsaremadeobsoletebynewskillsTheprocessofeconomicgrowthrenderssomemachinesobsoleteandalsoleavestheskillsofsomeworkerspartlyobsolete HighgrowthraterequiresrapidadjustmentsinthelabourforceSourcesofEconomicGrowth1 GrowthintheLabourForcea Growthinpopulationb Increasesinthefractionofthepopulationthatchoosestoparticipateinthelabourforce2 GrowthinHumanCapitala HumanCapitalsetofskillsthatworkershavei Increasesthrougheitherformaleducationoronthejobtrainingii Qualityofthelabourforceiii Sometimestreatedasseparatefactorofproductionfromlabour3 GrowthinPhysicalCapitala Thestockofphysicalcapitalincreasesonlythroughtheprocessofinvestmentb Improvementsinthequalityofphysicalcapital4 Technologicalimprovementa Innovation262EstablishedTheoriesofEconomicGrowthFocusontheLongRunThetheoryofeconomicgrowthisaLRtheoryItconcentratesonthegrowthofpotentialoutputoverlongperiodsoftimenotonSRfluctuationsofoutputaroundpotential YCI YCISIo InequilibriumdesiredsavingequalsdesiredinvestmentNowweallowtheinterestratetobeanendogenousvariable WecantakethelevelofoutputasgivenandusetheconditionthatdesiredsavingequalsdesiredinvestmenttodeterminetheequilibriumrealinterestrateInvestmentSavingandGrowth PrivateSavingYTC PublicSavingTG NationalSavingNSYTCTGNSYCGo ForagivenlevelofoutputintheLRanincreaseinhouseholdconsumptionorgovernmentpurchasesmustimplyareductioninnationalsaving NScurveisdownwardslopingbecauseo Anincreaseintheinterestrateisassumedtoleadhouseholdstoreducetheircurrentconsumptionondurablegoodsthatareoftenpurchasedoncredit NScurveissteepbecauseo Householdconsumptionrespondsonlymodestlytochangesintherealinterestrate AllcomponentsofdesiredinvestmentarenegativelyrelatedtotherealinterestratebecausewhethertheinvestmentisfinancedbyborrowingorbyusingthefirmsretainedearningstherealinterestratereflectstheopportunitycostofusingthesefundsIntheLRversionofourmacromodelwithrealGDPYtheequilibriuminterestrateisdeterminedwheredesirednationalsavingequalsdesiredinvestment IfinterestrateidesiredsavingexceedsamountofdesiredinvestmentexcesssupplyofloanablefundspushesdownthepriceofcredittherealinterestrateIncreaseintheSupplyofNationalSavingCanhappeneitherbecauseof Householdconsumptionfalls Governmentpurchasesfallo OrTrisesDeclineinCorGmeansthatnationalsavingsrisesatanyrealinterestrateandsotheNScurveshiftstotheright IncreaseinsupplyofNSexcesssupplyofloanablefundsdeclineintherealinterestrateo LeadstoanincreaseininvestmentprojectsHigherrateofinvestmenthigherfuturegrowthrateofpotentialoutputIntheLRanincreaseinthesupplyofnationalsavingreducestherealinterestrateandencouragesmoreinvestmentThehigherrateofinvestmentleadstoahigherfuturegrowthrateofpotentialoutputIncreaseinInvestmentDemandCanbecausedby Technologicalimprovementswhichincreasetheproductivityofinvestmentgoods
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