Unit 6

Economic Growth & Productivity

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 the burden of scarcity

§  Increases the general level of well-being

Conditions for Growth

§  Rule of Law

§  Sound Legal and Economic Institutions

§  Economic Freedom

§  Respect for Private Property

§  Political & Economic Stability

o   Low Inflationary Expectations

§  Willingness to sacrifice current consumption in order to grow

§  Saving

§  Trade

Physical Capital

§  Tools, Machinery, Factories, Infrastructure

§  Physical Capital is the product of Investment

§  Investment is sensitive to interest rates and expected rates of return

§  It takes capital to make capital

§  Capital must be maintained

Technology & Productivity

§  Research and development, innovation and invention yield increases in available technology.

§  More technology in the hands of workers increases productivity.

§  Productivity is output per worker.

§  More Productivity = Economic Growth

Human Capital

• People are a country’s most important resource. Therefore human capital must be developed.
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology

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 & debt increasing long term interest rates!
• Increased income inequality à Populist policies
• Restrictions on Free International Trade