15. Economic growth: definition and ingredients.

Economic growth - is achieved when there is an increase in a nations real income and output in a given year - an increase in real GDP occurring over some time period.

Ingredients of growth

Supply factors (факторы предложения) - related to the physical ability of the economy to expand.

They are:

-Improvement in technology:

-Increase in the quantity and quality of:

>Natural resources;

>human resources

>capital goods

Demand factors - to fully employ production potential expanding supplies of resources it is necessary to increase level of aggregate demand

Efficiency factor: the country must use its resources:

• in the least costly way - productive efficiency

• in producing the specific mix of goods and services that maximizes society’s well-being – all locative efficiency

Definition - a positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.

16. The theories of economic growth.

Adam Smith Inquiry into the Nature and Causes of the Wealth of Nations (1776):

Advocated division of labor, specialization (absolute advantage) & accumulation of capital

Advocated Laissez Faire - minimum government interference

Emphasized importance of a stable legal framework, within the market could function

David Ricardo:

Formalized notion of diminishing returns, but did not take innovation into account

Showed some of the welfare gains from specialization and international trade based on comparative advantage

Robert Solow: Neo-classical growth model

Growth depends on capital accumulation - increasing the stock of capital goods to expand productive capacity

Net investment and the need for sufficient saving to finance investment

Higher savings - postponing consumption to finance increased allocation of resources towards investment

Capital widening: capital stock rising at rate which keeps pace with labor force growth.

Capital deepening: capital stock grows faster than labor force. Considered more important.

Quality of capital goods - improvements due to R&D & innovation

Solow - a combination of capital deepening & technological improvement explains major trends in economic growth

1. Prediction - Adding more capital goods to a fixed amount of labor will lead to diminishing returns to capital.

2. Increased capital accumulation drives the rate of return on capital down

3. Eventually, the rate of return may be so low that no further net capital accumulation takes place.

4. In which case the rate of technological progress determined the rate of growth of output

Technological progress is assumed to be exogenous i.e. lies outside the growth model

Schumpeter:

Schumpeterian innovation - an explanation of technological progress

Long waves of innovation - "gales of creative destruction"

Increased profits arise because of constant birth of new products and new markets.

Technology raises productivity by increasing quantity and quality of all those resources to which it is applied.