Lecture 3: Economic growth

LOGO Lecture 3 Economic Growth Dr.Do Xuan Luan Faculty of economics and rural development FERD, Thai Nguyen University of Agriculture and Forestry TUAF... www.themegallery.com Company

LOGO

Lecture 3

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

1 Introduction to macroeconomics;

2 Gross Domestic Product (GDP);

3 Economic growth;

4 Unemployment

5 Inflation;

6 Aggregate Demand & Aggregate Supply (AS-AD model);

7 Fiscal Policy;

8 Monetary Policy;

9 Combined effects of monetary and fiscal policy;

10 Trading with the world;

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Contents

Models for economic growth

Governmental policies for economic growth Driving forces of economic growth

Measurement of economic growth Definition & importance of economic growth

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Definition & measurement of economic growth

Economic growth means an increase in real GDP

1 If based on total real GDP:

𝑔𝑡 = 𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃𝑡−1

In which:

 𝑔𝑡: 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡𝑕 𝑓𝑜𝑟 𝑡𝑕𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡;

 𝐺𝐷𝑃: 𝑟𝑒𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

2 If based on real GDP per capita

𝑔𝑝𝑐𝑡 = 𝑔𝑑𝑝𝑡 − 𝑔𝑑𝑝𝑡−1

In which:

 𝑔𝑝𝑐𝑡 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡𝑕 𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 𝑟𝑒𝑎𝑙 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝐺𝐷𝑃 𝑓𝑜𝑟 𝑡𝑕𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡

 𝑔𝑑𝑝: 𝑟𝑒𝑎𝑙 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

An example of measuring economic growth

 Applying this equation:

𝑔𝑡 = 𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃𝑡−1

𝐺𝐷𝑃𝑡−1 ∗ 100%

 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:

𝑔2015 = 𝐺𝐷𝑃2015 − 𝐺𝐷𝑃2014

𝐺𝐷𝑃2014 ∗ 100% = 193.6 − 186.2

𝑔2015= 3.97%

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

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Why economic growth is important?

Reduce

poverty

Reduce unemployment Budget deficits Living Standards

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Driving forces of economic growth for an

economy

Important factors

B

E

C

D

A

Social &

political

factors

Human resources

Natural resources

Technological

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Governmental policies for economic growth

Demand side

policies

Monetary Policies:

- Interest rate

Fiscal Policies:

- Cutting taxes

- Government spending

- Devaluation of

currency

Policies

Supply side policies

- Lower income taxes;

- Flexible labor market

- Privatisation and deregulation

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

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 of residents

4 Human resources, natural resources, capital formulation,

technological improvement and stable political 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

economic growth for each individual year

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C l i c k t o e d i t c o m p a n y s l o g a n

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