Lecture 3: Economic growth

LOGO Lecture Economic Growth Dr.Do Xuan Luan Faculty of economics and rural development (FERD), Thai Nguyen University of Agriculture and Forestry (TUAF) All lectures of the course Introduction to macroeconomics; Gross Domestic Product (GDP); Economic growth; Unemployment Inflation; Aggregate Demand & Aggregate Supply (AS-AD model); Fiscal Policy; Monetary Policy; Combined effects of monetary and fiscal policy; 10 Trading with the world; Contents Definition & importance of economic growth Measurement of economic growth Driving forces of economic growth Governmental policies for economic growth Models for economic growth www.themegallery.com Company Logo Definition & measurement of economic growth Economic growth means an increase in real GDP If based on total real GDP: 𝑡 − 𝐺𝐷𝑃 𝑡−1 𝐺𝐷𝑃 𝑔𝑡 = ∗ 100% 𝐺𝐷𝑃𝑡−1 In which:  𝑔𝑡 : 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡𝑕 𝑓𝑜𝑟 𝑡𝑕𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡;  𝐺𝐷𝑃: 𝑟𝑒𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 If based on real GDP per capita 𝑔𝑝𝑐 𝑡 𝑔𝑑𝑝𝑡 − 𝑔𝑑𝑝𝑡−1 = ∗ 100% 𝑡−1 𝑔𝑑𝑝 In which:  𝑔𝑝𝑐 𝑡 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡𝑕 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑟𝑒𝑎𝑙 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝐺𝐷𝑃 𝑓𝑜𝑟 𝑡𝑕𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡  𝑔𝑑𝑝: 𝑟𝑒𝑎𝑙 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 www.themegallery.com Company Logo An example of measuring economic growth  Applying this equation: 𝑡 𝑡−1 𝐺𝐷𝑃 − 𝐺𝐷𝑃 𝑔𝑡 = ∗ 100% 𝑡−1 𝐺𝐷𝑃  Real GDP of Vietnam in 2015: 𝐺𝐷𝑃𝑡 = 𝐺𝐷𝑃2015 = 193.6 USD billion  Real GDP of Vietnam in 2014: 𝐺𝐷𝑃𝑡−1 = 𝐺𝐷𝑃2014 = 186.2 USD billion  Economic growth of the year 2015 compared to 2014: 𝐺𝐷𝑃2015 − 𝐺𝐷𝑃2014 193.6 − 186.2 = ∗ 100% = ∗ 100% 2014 𝐺𝐷𝑃 186.2 𝑔2015 = 3.97% 𝑔2015 Interpretation: Total real gross domestic product in 2015 was 3.97% greater than in 2014 Importance note: you can compare economic growth between the year t and the year t-n Why economic growth is important? Reduce poverty www.themegallery.com Reduce unemployment Budget deficits Living Standards Company Logo Driving forces of economic growth for an economy Human resources B Social & political factors A Technological development www.themegallery.com C Natural resources Important factors E D Capital formulation Company Logo Governmental policies for economic growth Policies Demand side policies Monetary Policies: - Interest rate Fiscal Policies: - Cutting taxes - Government spending - Devaluation of currency www.themegallery.com Supply side policies - Lower income taxes; Flexible labor market Privatisation and deregulation Company Logo Harrod-Domar Growth Model The model suggests that the economy’s rate of growth depends on:  the level of saving  the productivity of investment i.e the capital output ratio Particularly:  Savings is an important source of investment  Net investment leads to more capital accumulation, which generates higher output and income  Higher income allows higher levels of saving Lewis Structural Change (dual-sector) Model  The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment  The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment  Lewis suggested that the modern industrial sector would attract workers from the rural areas www.themegallery.com Company Logo Rostow’s Model – the Stages of Economic Development: Summary of key points Economic growth refers to the increase in real GDP Economic growth is measured on basis of total real GDP or per capita GDP Economic growth is significant to reduce poverty, create employment, increase government budget and improve living standard of residents Human resources, natural resources, capital formulation, technological improvement and stable political conditions are main factors for economic growth Policies for economic growth aims at both demand & supply side of the economy Three well known models for economic growth: Harrod-Domar Growth Model, Lewis Structural Change (dual-sector) Model and Rostow’s Model – the Stages of Economic Development Assignment 1) Based on data on the assignment 2, calculate economic growth for each individual year 2) Make comments on results www.themegallery.com Company Logo LOGO www.themegallery.com Click to edit company slogan [...]... conditions are main factors for economic growth 5 Policies for economic growth aims at both demand & supply side of the economy 6 Three well known models for economic growth: Harrod-Domar Growth Model, Lewis Structural Change (dual-sector) Model and Rostow’s Model – the 5 Stages of Economic Development Assignment 3 1) Based on data on the assignment 2, calculate economic growth for each individual year...Rostow’s Model – the 5 Stages of Economic Development: Summary of key points 1 Economic growth refers to the increase in real GDP 2 Economic growth is measured on basis of total real GDP or per capita GDP 3 Economic growth is significant to reduce poverty, create employment, increase government budget and improve living standard