MCD 2090 Macroeconomics (week 4)

Tutorial 4: Long-run Economic Growth: Sources and Policies

Period 1
Section A – Homework
1. Why does a country’s economic growth rate matter?
GDP measures overall size of output of an economy during a certain period. GDP is also
used to track a country’s output/productivity level from time to time and also to compare
with other countries. This comparison is useful for preparing budgets adn plans for fiscal
and monetary policies. However, GDP only measures output level and not economic welfare
of citizens.
2. Using the per-worker production function show the effect on real GDP per hour
worked of an increase in capital per hour worked, holding technology constant. Now,
again using the per-worker production function graph, show the effect on real GDP per
hour worked of an increase in technology, holding the quantity of capital per hour worked
constant.
Per worker production function shows how much a single worker will produce based
on land or capital. Formula is y=z(C or L)X. Y is output, Z is total productivity
factor. C is capital, L is land, X is constant to account for diminishing returns. As
shown on the graph, increased capital per hour worked caused a movement along
f(x) 1 from A to B. However it will eventually increase the diminishing returns.
3. What are the consequences for economic growth of diminishing returns to capital?
How are some economies able to maintain high growth rates despite diminishing returns to
capital?

4. What is the new growth theory? How does the new growth theory differ from the
growth theory developed by Robert Solow?

Section B
5. Use the data on real GDP in this table to answer the following questions.

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a. Which country experienced the highest rate of economic growth during 2008 (that is,
for which country did real GDP increase the most from 2007 to 2008)?
b. Which country experienced the worst economic recession during 2009? Briefly
explain.
c. Which country experienced the highest average annual growth rate between 2008 and
2010?

6. Which of the following will result in a movement along Japan’s per-worker

production function, and which will result in a shift of Japan’s per-worker production
function? Briefly explain.
a. Capital per hour worked increases from ¥5 million per hour worked to ¥6 million per
hour worked.
b. The Japanese government doubles its spending on support of university research.
c. A reform of the Japanese school system results in more highly trained Japanese
workers.

7. Use the following graph to answer the questions.

a. True or False: The movement from point A to point B shows the effects of
technological change.
b. True or False: The economy can move from point B to point C only if there are no
diminishing returns to capital.

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c. True or False: To move from point A to point C the economy must increase the
amount of capital per hour worked and experience technological change.

8. Read
When answering questions based on articles, please note the following steps;
the
Step 1: Read all the questions from the article. article
and
Step 2: Number all the paragraphs in the article answer
Step 3: Browse through the article and match the questions and the paragraphs the

Step 4: Write the answers to the questions

(Do not try to understand each and every word in the article)

following questions
i. According to the Solow growth model, what should developing countries focus to increase
economic growth? According to paragraph 2, developing countries should increase
long term savings and investment rates. The theory predicts that an increase in
the savings rate would lead to higher economic growth through investment and
capital accumulation. Growth and development require access to substantial long-
term savings pools that we may parlay into investments (new schools, waterways,
broadband networks, etc.) that power stronger growth. A higher savings rate on
the national level can be translated into investment in infrastructure and capital
requirements for the growth of several industries. This may be low-hanging fruit
for Nigeria as well since the country has a ridiculously low savings rate. 

i. According to the article, how do you define the technology? We can define technology
as the current state of knowledge on how to combine resources to produce
desired products, to solve problems, fulfil needs, or satisfy wants; it includes
technical methods, skills, processes, and techniques. For example, the invention
a new irrigation method and the creation of a more efficient credit process for
farmers count as new technology. Technology is the only method to increase
living standards according to the Solow model. According to paragraph 3, It is
impossible for a economy to grow in the long term just from accumulating more
capital as there is always the law of diminishing return. However, with the help of
technological innovation, factors of production such as land, labour, capital, and
enterprise can be used more efficiently and reduces diminishing returns.

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 ii. Using production function
graphs, analyse the impact
of improvement in
technology in agriculture
sector and its impact on the
Nigeria’s economic
growth.
Increase in technology leads
to an increase in productivity
and decrease in the amount
of diminish returns caused by
added capital. In other
words, this leads to an
upward shift in the
production function
(fx1>fx2) and increases
economic growth especially
in the agriculture sector. This improvement in technology leads to more efficient use of
factors of production in agriculture. It would also increase quality of output and it would
give comparative advantage to Nigeria’s agriculture exports. And since Nigeria is overly
dependant on oil, this improvement in the agriculture sector is much needed to diversify
sources of income as oil is a finite resource. This first step into unlocking Nigeria’s potential
outside of oil is also attractive to foreign investors. Higher foreign investment is necessary
for developing countries (paragraph 2) as it would increase jobs, output, and growth.
Foreign investment also means foreign knowledge and technology which could further help
increase Nigeria’s labour productivity. But most importantly, increase in agriculture
production would help tackle one of Nigeria’s biggest issues as stated on paragraph 6, which
is food insecurity. This is possible with startups such as Zenvus and SunCulture, as they
tackle the problems of water shortage, and farm productivity. In the long run, with better
diversity of income, better technology, and better education, it would help achieve Nigeria’s
goals such that stated on paragraph 7, which is better education, infrastructure, and
productivity.
ECONOMY - 19 FEB 2018
The solution to long-run growth in Nigeria
by Stears Business Limited 2017

(1)Nigerians typically have multiple sources of income. To have a single income source in

Nigeria is to play yourself; never put all your eggs in one basket. Yet, it seems like the only
Nigerian without multiple hustles is Nigeria itself. Oil accounts for about 70% of Nigeria's
federal revenues and 90% of its foreign exchange earnings. No surprise then that the 2014
crash in oil prices triggered a recession, foreign exchange crisis, and higher government
borrowing. Relying on commodities as your primary source of income (known as Dutch
Disease) leaves the country vulnerable. Hence the growth of the diversification rhetoric. The
question is, "What can Nigeria do to diversify its economy and earnings?"
(2)The goal of policymakers should be to drive competitiveness, innovation, growth and
productivity. According to the Solow growth model, arguably the most comprehensive theory
of long-term economic growth, developing countries need to increase their long-term savings
and investment rates. The theory predicts that an increase in the savings rate would lead to

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higher economic growth through investment and capital accumulation. Growth and
development require access to substantial long-term savings pools that we may parlay into
investments (new schools, waterways, broadband networks, etc.) that power stronger
growth. A higher savings rate on the national level can be translated into investment in
infrastructure and capital requirements for the growth of several industries. This may be low-
hanging fruit for Nigeria as well since the country has a ridiculously low savings rate. 
(3) The story doesn't end with savings and capital accumulation, however. The Solow model
makes a bold claim: the only way of sustainably increasing living standards in the long-term
is through continual technological progress. It is impossible for an economy to grow forever
solely by accumulating more capital. While savings and investment help with near-term
growth, the key to sustainable long-term growth is continued technological progress. 
(4)With regards to economic growth and development, we need a more nuanced definition.
We can define technology as the current state of knowledge on how to combine resources to
produce desired products, to solve problems, fulfil needs, or satisfy wants; it includes
technical methods, skills, processes, and techniques. Therefore, both the invention a new
irrigation method and the creation of a more efficient credit process for farmers count as new
technology.  
(5)Developing new technology would provide solutions to Nigeria's most pressing problems
like abysmal health care, weak financial system, education and so on. Technology does this
by improving infrastructure like power supply, creating a conducive business environment
and improving educational systems, unlocking regional manufacturing and trade, and
improving the physical and digital support we need to sustain growth in the long
run. Technological progress increases productivity. For example, mobile banking and cash
transfers have significantly impacted the ease of doing business in Nigeria. Introduction of
mobile banking has reduced transaction time, reduced transaction cost, and increased the
number of transactions conducted. 
(6)The agriculture sector shows us the potential scope for the impact of technology. Zenvus, a
Nigerian precision farming startup measures and analyses soil data like temperature,
nutrients, and vegetative health to help farmers apply the right fertiliser and optimally irrigate
their farms. The process improves farm productivity and reduces input waste by using
analytics to facilitate data-driven farming practices for small-scale farmers. SunCulture,
which sells drip irrigation kits that use solar energy to pump water from any source, has made
irrigation affordable. Each of these helps Nigeria in the drive for long-term food security. 
(7)Previous paragraphs touched on how technology has improved productivity in agriculture
and financial services, but it applies everywhere. The key is to develop technologies that
would solve uniquely Nigerian problems while producing goods and services for
consumption and trade regardless of industry. These include solutions to health care issues,
weak state-run education systems, broken infrastructure and low productivity in factories.
(8)We need a strong focus on long-run growth.  In addition to focusing on improving
industries and making more money by selling more commodities, there should be a focus on
innovating solutions to people's problems, ensuring income equality and improving the
standard of living. Nigeria has the chance to lead the continent of Africa in the fourth
industrial revolution.

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Source: Merlin Uwalaka, Stears Business Limited (2017), ‘the solution to long-run growth in
Nigeriay, 19 February, at < https://www.stearsng.com/article/the-solution-to-long-run-
growth-in-nigeria>, viewed 15 March 2018.

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Period 2

Section A – Homework
1. Why does the economic growth model predict that poor countries should catch up to
rich countries in income per capita? Have poor countries been catching up to rich
countries?
Solow’s economic growth model states that Growth comes from adding
more capital and  labour inputs and also from ideas and new technology. The Solow
Model features the idea of  catch-up growth when a poorer country is catching up with a
richer country, often because a higher marginal rate of return on invested capital in
faster-growing countries.The Solow model predicts some convergence of living standards
(measured by per capita incomes) but the extent of catch up in living standards is questioned,
not least the existence of the middle-income trap when growing economies find it hard to
sustain growth and rising per capita incomes beyond a certain level. One of the ways poor
country can catch up is by opening their country to foreign direct investments and global
trade. Poor country can catch up with developed countries as developed countries have
peaked in terms of economic growth due to ageing population while developing countries
still have many untapped potential.

2. What are the main reasons why many poor countries have experienced slow economic
growth?
Factors include lack of education, lack of infrastructure, war and conflict and lack of access
to healthcare and nutrition. Poor countries usually have a large potential in its natural
resources, but lacks the skilled labour to manage this potential. This could lead to the vicious
cycle. Lack of education also leads to lack of financial literacy, this means low savings and
people spend whatever they earn. Lack of certain factors of production such as enterprise
and investment and infrastructure.

War and conflict also decreases economic growth

3. What does globalisation mean? How have developing countries benefited from
globalisation?
Globalisation means less barrier between countries and people. For developing countries, this
means that international trade and foreign direct investment can increase. Specialisation also
occurs as global trade increases. This can increase productivity and output.
4. Briefly describe government policies that can increase economic growth.
Fiscal policies through tax and subsidies can impact the short run economic growth the
most. In the long run, supply side policies such as infrastructure and education is the best
way to improve living standards.

Section B
5. Can economists arrive at the conclusion that economic growth will always improve

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 economic wellbeing? Briefly explain.
Economic growth refers to the increase in output of an economy over a certain period of
time, adjusted with inflation. Economic wellbeing refers to the improvement of living
standards, and sustainable growth. Ideally, economic growth can lead to full employment,
price stability, economic growth, low current account deficit, and low public sector debt.
Meanwhile, economic wellbeing is based on the human development index. This includes life
expectancy, which indicates quality of healthcare and quality of life, mean years of
schooling, and GNI per capita.
According to the Solow economic growth model, growth can occur if there is a breakthrough
in technology, or increase in capital/labour. However, the law of diminishing returns applies
to the latter, meaning capital and labour can only be added to a certain extent in order to
function efficiently. Furthermore, technology can shift the graph upwards and create a new
limit for growth.

Economic growth does not always mean economic wellbeing as long as inequality and
corruption occurs, especially in a free market economy as stated by the Pareto law of
optimality. The law states that one cannot be better off without making the other person
worse off. A country can have a high GDP but if the economy is controlled by only a select
few, then income cannot be distributed equally. A way for government to fix this is by using
fiscal policies such as taxes and subsidies. The use of tiered income tax can distribute wealth
better. Cross-Subsidies and supply side policies such as free education, healthcare, and
infrastructure can also reduce inequality through increasing labour quality and productivity.

6. Why might some people in high-income countries be more concerned with certain
negative consequences of rapid economic growth than people in low-income countries?
High income countries are countries with high employment levels, high minimum
wages, high average income, developed social security systems, healthcare,
legal, and technology. High income countries include Singapore, Norway, and
Canada.
Rapid economic growth comes with benefits and consequences. Benefits of rapid
economic growth includes higher income per capita and better living standards.
Better access to public facilities such as education, healthcare, and
infrastructure. This would be especially useful for low-income developing
countries in the majority world. However, this may not matter as much for high-
income developed countries as they have already developed good public sector
and high living standards. Negative impact of rapid economic growth relates to
negative externalities, this includes environmental damage due to rise in
production levels, higher consumption of demerit goods such as junk food and
alcohol, and increase in waste. This increase in waste can reduce social welfare
funds and create market failure. Citizens in high-income countries are also more
concerned about environmental issues compared to low-income countries as
their basic needs are already fulfilled and they are highly educated.
Governments in high-income countries can focus more on its citizens’ economic
wellbeing compared to chasing high economic growth.

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Read the article and answer the following questions
iv.Why
When answering questions based on articles, please note the following steps; has India
relaxed
Step 1: Read all the questions from the article.
the rules
Step 2: Number all the paragraphs in the article
Step 3: Browse through the article and match the questions and the paragraphs
Step 4: Write the answers to the questions

governing foreign investment?

India is facing a crisis “(India) needs to activate its stalled engines—agricultural growth and
rural demand; trade; and private investment—while ensuring that the active engines, pickup
in industrial activity and the services sector do not run out of fuel. From a peak of 24 per
cent in 2009–10, gross capital formation grew at zero per cent last year. With private
investment depressed, the government is turning to the world for investment.” Thus it is using
regulation, which is a part of supply side policies to fight this crisis as they do not have
enough private investment.

v.What are the sectors that will receive approvals for 100 per cent FDI?

pharmaceuticals, food processing, information and broadcasting, air transport, single-brand

retail and defence
vi.How will the increase in capital investments will affect the Indian economy? Explain using
production function graph.
India is planning to increase FDI, which will increase capital.

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vii. How will technological change will affect Indian economy? Explain using production
function graph.
As seen on the production graph, a change in technology could shift the production function
from f(x)1 to f(x)2. This is because technology could reduce the amount of diminishing
returns from capital and labour investments. This means that India can invest more capital
and labour, increase output with less marginal for diminishing returns.

The FDI big bang

by Shweta Punj, Sandeep Unnithan & M. G. Arun
INDIA TODAY 23 JUNE 2016

The Narendra Modi government makes its most audacious push for Foreign Direct
Investment. Will it deliver the mega bucks? Union commerce minister Nirmala Sitharaman
rolled out the specifics of the policy; India had flung its doors open wider to foreign
investment. Foreigners could now own airlines, set up food processing firms, defence
manufacturing units and buy pharmaceutical companies.
It was the most assiduous wooing of FDI in the 20 years since the government had first
looked to foreign exchange as a fuel to kickstart the engines of its economy. Six FDI sectors
—pharmaceuticals, food processing, information and broadcasting, air transport, single-brand
retail and defence—saw approvals for 100 per cent FDI.
‘FDI ghar baithe baithe nahin aati (FDI doesn’t come sitting at home),’ Union external affairs
minister Sushma Swaraj told the media in New Delhi on June 19. She was explaining her
government’s massive diplomatic outreach where it hopes to have established contact with all
the countries of the world by the year-end. Swaraj identified the number one objective of this
outreach: to increase FDI in India, the stated aim of various governments since the dawn of
economic liberalisation 25 years ago.
They have tried to attract and promote FDI to supplement domestic capital, technology and
skills to accelerate economic growth, with mixed results. Until 2005, FDI inflows into India
accounted for only 0.8 per cent of the global total. Successive governments, including the
UPA, have adopted the incremental approach to increasing FDI. But under the Modi
government, FDI has been pursued with missionary zeal. In 2015, India attracted $44 billion
in foreign investment, or 2.51 per cent of world FDI flows.
The reasons for the government’s FDI zeal are crisis-driven. The Indian economy faces a
threefold challenge, as pointed out by a World Bank Study—India Development Update—
released on June 20. India, the report says, needs to activate its stalled engines—agricultural
growth and rural demand; trade; and private investment—while ensuring that the active
engines, pickup in industrial activity and the services sector do not run out of fuel. From a
peak of 24 per cent in 2009–10, gross capital formation grew at zero per cent last year. With
private investment depressed, the government is turning to the world for investment.
Easing FDI across sectors and placing most sectors on the automatic route, it essentially
means investors can skip the layers of India’s notoriously tardy bureaucracy if they want to
invest in the country. It is targeted towards implementing the government’s promise of
improving the ease of doing business in India, apart from giving infrastructure and rural
economy a push.

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‘The decision is to encourage investment which will lead to job creation,’ says Shaktikanta
Das, secretary, Department of Economic Affairs. ‘This is in sync with the government’s
philosophy of minimum government and maximum governance.’
INDIA TODAY
Source: Shweta Punj, Sandeep Unnithan, & M. G. Arun, (2016), ‘The FDI big bang’, India
Today, 23 June, at <www.indiatoday.intoday.in>, viewed 8 November 2016.

8. Complete Post-class homework after watching the video.

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