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WMU ECON 3880 - Economic Growth: Concepts and Patterns

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Chapter 3Economic Growth: Concepts & PatternsDivergent Patterns of Economic Growth since 1960See table 3.1 for Average Growth Rates across countries 1960-2003:Why is Botswana Successful (Read Box 3.1)Factor Accumulation, Productivity Growth, Econ. GrowthFig. 3.1 Basic Sources of Growth: Production function Q=f(K)-capital accumulation)Fig. 3.1 bottom: Productivity GainsSaving, Investment & Capital AccumulationSources of Growth AnalysisExample of Growth AccountingEconomic Growth Across Countries 1960-2003: table 3.1Sources of Growth Across Countries 1960-2000 (1980s) based on table 3.2Characteristics of Rapidly Growing CountriesMacroeconomic stabilityFig. 3.2: Inflation and Growth in 1990sFig. 3.3: GDP per capita before and After Civil WarInvestment in Education and Health ( Human Capital)Fig. 3.4: Growth and Life Expectancy RelationsEffective Governance and InstitutionsFig. 3.5: Governance and GrowthInstitutions, Governance & Growth read box 3.2 on page 82-83Favorable Environment for Private EnterpriseFig. 3.6: Degree of OpennessDoes Geography Matter?Fig. 3.7: The Destiny of Geography?Fig. 3.8: Growth and GeographyProduction Function & Diminishing ReturnsImplications of Diminishing marginal product of CapitalFig. 3.9: The effect of Diminishing Marginal Product of CapitalFig. 3.10: Growth & Initial Per capital levelThe Convergence Debate: Is there convergence?Fig. 3.11: Conditional Convergence Among OECD CountriesFig. 3.12Economic Growth & Structural ChangeReasons for the Decline of Share of AgricultureFig. 3.13: Structural transformation among four developing countriesFig. 3.14Fig. 3.15: Decreasing Share of Rural Population with income riseChapter 3: Economic Growth SummaryEnd Chapter 3Chapter 3EconomicGrowth:Concepts andPatternsNorton Media LibraryDwight H. PerkinsSteven RadeletDavid L. LindauerEconomic Growth: Concepts & Patterns–Divergent Patterns of Economic Growth since 1960 –Factor Accumulation, Productivity Growth, Econ. Growth –Saving, Investment, & Capital Accumulation –Sources of Growth Analysis –Characteristics of Rapidly Growing Countries •Macroeconomic and Political Stability •Investment in Health and Education •Effective Governance and Institutions •Favorable Environment for Private Enterprise •Favorable Geography ??–Diminishing Returns and the Production Function –The Convergence Debate –Economic Growth and Structural ChangeDivergent Patterns of Economic Growth since 1960 •After 1960s LDCs begin to diverge•For example per capital income in Thailand was $1100 and that of Zambia was $1200•Thailand now has per capita income of $7000, but Zambia is about $900?•What happended? Growth difference Thailand grew over 4.5% and Zambia growth was -0.6% (negative)See table 3.1 for Average Growth Rates across countries 1960-2003: •Negative Growth (Nigeria, Zambia,Chad, etc) <0•Slow Growth (Kenya, Ghana, Rwanda, Argentina) 0.12<G<1.3 •Moderate growth (Lesotho, Egypt, Brazil, India)•2.1<G< 2.75•Rapid Growth (Botswana, Malaysia, South Korea, Singapore <3.32 G< 6.3•Industrial Countries (Japan USA, Canada, UK)Japan G- 4.11, USA= 2.42Why is Botswana Successful (Read Box 3.1)•Between 1970-90, Botswana was the fastest growing country in the world at about 8% per year.•But at independence in 1965, it was poor it had 100 high school graduates and 22 college graduates.•What is the main source of success: Good policies and strong institution and democratic government•Protection of property rights and minimal corruption including civil service base on merit not on patronage•These has led to highest per capital income and best HDI •Recent challenge: High HIV/AIDS infection rate has reversed this.Factor Accumulation, Productivity Growth, Econ. Growth •Factor Accumulation: increase in the size of capital stock and labor force. More machines, factories, buildings, roads, electricity, computers and tools along with better trained workers•Productivity Growth: Amount of output per unit of machine or worker: increases in 2 ways by greater efficiency-specialization, and technological change.•This can be explained using production function•Q= f (Labor, Capital, etc…)Saving, Investment & Capital Accumulation Key Elements of Economic Growth•New investment increases the capital stock •Investment (I) is financed through savings (S) I=f(S)•Savings comes from income of GDP S= f(GDP)•These decisions are made by consumers, firms corperations, & governments•Sustaining Growth requires both generating new investment and making sure it is productive & employment creating.Sources of Growth Analysis•Solow Model: Exlores the contribution of each factor to increase to output: Q(K, L, Productivity gains)•Growth Accounting or Source of Growth Analysis•Yg= (Wk x Kg) + (Wn x Lg+ A•Yg= growth of income•Kg, Lg= growth of capital and labor•Wk, Wn= share of capital and labor •A= rate of productivity of inputs= residualExample of Growth Accounting •Assume the following: Yg=0.05 (GDP)•Kg=0.07 (7 percent),KL=.02 (labor growth)•WL=0.06 share of labor in income (6%)•Wk= 0.04 (share of capital in income (4%)•Substitute in Yg= WkKg + LwLg +A• 0.05= (0.4 x 0.07) +( 0.6 x0.02) +A•A= 0.01 or 1 percentEconomic Growth Across Countries 1960-2003: table 3.1•Negative Growth (Nigeria, Chad, Senegal) •Slow Growth (Kenya, Ghana, South Africa)•Moderate Growth (Lesotho, Egypt, Brazil)•Rapid Growth (Botswana, Malaysia, S.Korea, Thailand)•Industrial Countries (Japan, US, Canada)Sources of Growth Across Countries 1960-2000 (1980s) based on table 3.2•Country/Region: Output(Q) K Education TFP•Brazil -1.63 0.16 0.68 -2.47•Ethiopia -1.74 1.11 0.27 -3.12•Ghana -1.14 -1.23 o.15 0.07•Africa -1.06 -0.07 0.42 -1.41•East Asia 4.36 2.45 0.66 1.25•Latin America -1.77 0.04 0.47 -2.28•Middle East 1.15 0.55 0.53 0.07•South Asia 0.68 1.02 0.42 2.25Characteristics of Rapidly Growing Countries•1. Macroeconomic stability•2. Investment in Health and Education•3. Effective Governance and Institutions•4. Favorable Environment to Private Enterprise•5. Favorable Geography or location?Macroeconomic stability•Macroeconomic implies avoiding


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