Session 4

Economic Growth

Prof Subramania Raju Rajasulochana

Associate Professor
SBM, NMIMS Mumbai
Review
• Factor Cost, Basic Price and Market Price
• Other measures – PI, DI
• RBI’s DBIE
Economic Growth
Either an increase in real GDP or real GDP per capita
over some time period.
Percentage rate of growth either on a quarterly or
yearly basis.
An economic goal  higher standard of living

Looking at GDP per capita allows one to compare

countries of different sizes.
For country-to-country comparisons, real GDP is more
useful.
Arithmetic of growth
Rule of 70.
Approximate 70
number of years
required to double
= annual percentage rate
real GDP of growth

Assume that a leader country has real GDP per capita of $40,000, whereas a
follower country has real GDP per capita of $20,000. Next suppose that the
growth of real GDP per capita falls to zero percent in the leader country and
rises to 7 percent in the follower country. If these rates continue for long
periods of time, how many years will it take for the follower country to catch up
to the living standard of the leader country?
Uneven distribution of Growth
The Great Divergence in Standards of Living
Modern Economic Growth
began with the Industrial
Revolution in late 1700s
- Ongoing increases in
living standards
- Time for leisure
- Social change
- Democracy
- Human lifespan doubled
Institutional Structures of Growth
Strong property rights
Patents and copyrights
Efficient financial institutions
Literacy and widespread education
Free trade
Competitive market system
Economic Growth and the Production Possibilities Curve
Sources of Economic Growth

• Decompose economic growth into:

Source: Errol D’souza, Macroeconomics(2008), p.437

Source: Errol D’souza, Macroeconomics(2008), p.437
Determinants of Growth
Demand factor: Households, businesses, and
government must purchase the economy’s expanding
output.
Efficiency factor: Must achieve economic efficiency
and full employment.
The Supply Determinants of Real Output
Why the Rise in Average Productivity Growth
Between 1995 and 2010?
Microchip and information technology
Start-up firms and increasing returns
Sources of increasing returns
• More specialized inputs
• Spreading of development costs
• Simultaneous consumption
• Network effects
• Learning by doing
Global competition
Productivity Slowdown
High debt levels accumulated by individuals and firms
prior to the Great Recession
Overcapacity, which makes firms reluctant to purchase
newer, more productive equipment.
Free Internet apps, so they are not measured in GDP
Slowdown in technological progress
Is Growth Desirable?
The antigrowth view: Environmental and resource
issues.
In defense of economic growth:
• Higher standard of living.
• Human imagination can solve environmental and
resource issues.
Economic Growth Defense
Growth is the path to greater material abundance.
Results in higher standards of living.
Increases leisure time.
Allows for the expansion and application of human
knowledge.