e conomic g rowth. growth = annual growth rate of p c income, gdp growth rates across the world 65...
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ECONOMİC GROWTH
Growth = Annual Growth Rate of p c Income, GDP
Growth Rates across the world 65 – 95:“spectaculat”: China (8.2 %)“very good”: East Asia (5.5 %)“decent”: South East Asia“bad”: Latin America“very bad”: Sub Saharan Africa
MODERN ECONOMİC GROWTH : BASİC FEATURES Today a growth rate of 2% is no surprise! Leaders over past four centuries:
1580 – 1820: Netherlands 0.2% (real p c GDP growth),
1820 – 1890: U.K. 1.2 % (annual growth of GDP), 1890 – 1989: U. S. 2.2 % (average annual growth
rate). With a 2% rate, nation’s pc GDP doubles in
35 years => shorter than a life span!
THEORİES OF ECONOMİC GROWTH
Economic growth is the result of abstention from current consumption.
Economy produces variety of products => production generates income => Income buys these commodities produced (depending on distribution of income and preferences).
CİRCULAR FLOW OF ECONOMİC ACTİVİTY
Firms
Households
Consumption Expenditure
Wages, Profits, Rents
outflow
inflow outflow
inflowinvestment
savings
TWO GROUPS OF COMMODİTİES
Consumption Goods: Produced for the purpose of satisfying human needs and preferences => Households buy
Capital Goods: Produced for the purpose of producing other commodities => Firms buy
SAVİNG - INVESTMENT
If all income is paid out to households, and if households spend their income on consumption goods, where doest the market for capital goods come from? Households save, by abstaining from current
consumption, households make available pool of loanable funds that firms use to buy capital goods.
Buying power is channeled from savers to investors through banks, individual loans, governments, and stock markets.
STARTİNG POİNT OF ALL OF THE THEORY OF ECONOMİC GROWTH:
Without the initial availability of savings, it would not be possible to invest and there would be no expansion!
Macroeconomic Balance: Investment Demand = Savings Leakage
SAVİNG & INVESTMENT Households’ Choice
Households receive income Y, can either save or consume, i.e.
Y = C + S Firms’ Choice
Firms produce a set of goods worth Y, these are either investment or consumption goods, i.e.
Y = C + I Households and Firms in a Closed Economy
In a closed economy, the value of savings equals the value of investment
Y = C + I Y = C + S => S = I
KEY DEFINITION: INVESTMENT
Investment: Change in Capital Stock I(t)= K(t) – K(t-1)
Intangible vs. Tangible objects that contributes to increased production.
Human Capital: Act of training and education
Change in Capital Stock occurs because of : Deliberate actions of firms, i.e. Purchase of new capital
goods, sale of old capital goods Depreciation, i.e. Natural wear and tear
Economic Growth is positive when investment exceeds the amount necessary to replace depreciated capital, thereby allowing the next period’s cycle to recur on a larger scale => Economy expands!
THE HARROD – DOMAR MODEL -3-
Recipe:
Growth pc = (savings rate/ capital output ratio) - population growth rate -
depreciation