Economic Growth

Long-Run Economic Growth

The University of Ghana Business School

UGBS 204: Macroeconomics for Business

UGBS 204: Lecture two

 Economic Growth

Outline

1 Economic Growth
Meaning of Economic Growth
Importance of long-term Growth
Sources of Economic Growth
Economic growth and income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Outline

1 Economic Growth
Meaning of Economic Growth
Importance of long-term Growth
Sources of Economic Growth
Economic growth and income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

What is Economic Growth?

Economic growth relates to long-term changes in real GDP

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

What is Economic Growth?

Economic growth relates to long-term changes in real GDP

Can be defined as expansion of the country’s potential GDP
or national output

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

What is Economic Growth?

Economic growth relates to long-term changes in real GDP

Can be defined as expansion of the country’s potential GDP
or national output
It is sustained expansion in the production of goods and
services in an economy over time

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

What is Economic Growth?

Economic growth relates to long-term changes in real GDP

Can be defined as expansion of the country’s potential GDP
or national output
It is sustained expansion in the production of goods and
services in an economy over time

A steady increase in the market value of goods and services

produced by an economy overtime

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

What is Economic Growth?

Economic growth relates to long-term changes in real GDP

Can be defined as expansion of the country’s potential GDP
or national output
It is sustained expansion in the production of goods and
services in an economy over time

A steady increase in the market value of goods and services

produced by an economy overtime

Economic growth can also be seen as expansion of a country’s

production possibilities frontier

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Economic Development

Economic development is close related to economic growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Economic Development

Economic development is close related to economic growth

Broadly speaking,the process of economic development refers

to sustained expansion in the capacity of an economy to
provide for the material wellbeing of its members above and
beyond the level of subsistence

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Economic Development

Economic development is close related to economic growth

Broadly speaking,the process of economic development refers

to sustained expansion in the capacity of an economy to
provide for the material wellbeing of its members above and
beyond the level of subsistence

While growth of income per capita is an essential for

economic development, economic growth does not necessarily
lead to economic development

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Economic Development

Economic development is close related to economic growth

Broadly speaking,the process of economic development refers

to sustained expansion in the capacity of an economy to
provide for the material wellbeing of its members above and
beyond the level of subsistence

While growth of income per capita is an essential for

economic development, economic growth does not necessarily
lead to economic development

Economic development can be seen as economic growth

accompanied by material changes in peoples standards of
living
UGBS 204: Lecture two
 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Outline

1 Economic Growth
Meaning of Economic Growth
Importance of long-term Growth
Sources of Economic Growth
Economic growth and income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Importance of long-term growth rate

According to World Bank’s World Development Indicators,

Ghana GDP per capita in 1960 was $182.98

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Importance of long-term growth rate

According to World Bank’s World Development Indicators,

Ghana GDP per capita in 1960 was $182.98
In the 50 years since 1960, annual per capita GDP growth
rate was 4.036% so the per capita GDP in 2010 was $1323.1
GDP per capita2010 = $182.98(1 + 0.04036)50

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Importance of long-term growth rate

According to World Bank’s World Development Indicators,

Ghana GDP per capita in 1960 was $182.98
In the 50 years since 1960, annual per capita GDP growth
rate was 4.036% so the per capita GDP in 2010 was $1323.1
GDP per capita2010 = $182.98(1 + 0.04036)50
If the growth rate of per capita income over the subsequent
50 years had been only 1 percentage point higher, what will
GDP per capita be in 2010?
GDP per capita2010 = $182.98(1 + 0.05036)50 = 2134.6

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and standards of living

Per capita income/GDP is the total GDP divided by the total

population

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and standards of living

Per capita income/GDP is the total GDP divided by the total

population
It is commonly used as a measure of the standard of living of
a country

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and standards of living

Per capita income/GDP is the total GDP divided by the total

population
It is commonly used as a measure of the standard of living of
a country
Economic growth is very important for expanding living
standards
Sometimes people measuring economic growth with increases
in the per capita GDP

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and standards of living

Per capita income/GDP is the total GDP divided by the total

population
It is commonly used as a measure of the standard of living of
a country
Economic growth is very important for expanding living
standards
Sometimes people measuring economic growth with increases
in the per capita GDP

A steady increase in the market value of goods and services

produced by an economy overtime

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and standards of living

Rapid economic growth allows countries to more of everything

to their citizens
better food and bigger homes
more resources for health care
universal education for children
better pensions for retirees

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Outline

1 Economic Growth
Meaning of Economic Growth
Importance of long-term Growth
Sources of Economic Growth
Economic growth and income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

.....“Many roads lead to Rome”

There are many different successful strategies to sustained

economic growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

.....“Many roads lead to Rome”

There are many different successful strategies to sustained

economic growth
Britain became world economic leader in the 19th century by
pioneering the Industrial Revolution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

.....“Many roads lead to Rome”

There are many different successful strategies to sustained

economic growth
Britain became world economic leader in the 19th century by
pioneering the Industrial Revolution
Japan became world economic superpower by initially
imitating foreign technologies
it then developed high level of expertise in manufacturing and
electronics

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

The four wheels of growth

Although there different individual paths to sustained

economic growth, there are common fundamental factors the
underlie all sustained economic expansion

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

The four wheels of growth

Although there different individual paths to sustained

economic growth, there are common fundamental factors the
underlie all sustained economic expansion
Aggregate production/ GDP (Q) is produced using the
following technological relationship: Q = AF (K , L, R)
where A: level of technology in the economy
K is productive services of capital
L is labour units
R is raw material inputs

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

The four wheels of growth

Although there different individual paths to sustained

economic growth, there are common fundamental factors the
underlie all sustained economic expansion
Aggregate production/ GDP (Q) is produced using the
following technological relationship: Q = AF (K , L, R)
where A: level of technology in the economy
K is productive services of capital
L is labour units
R is raw material inputs
If GDP is produced with these inputs, growth rate of GDP will
come from growth rate of these inputs

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Human Resources and Economic growth

Human resources refer to the quantity and quality of labour

inputs

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Human Resources and Economic growth

Human resources refer to the quantity and quality of labour

inputs
The quantity of human resources refer to the labour supply

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Human Resources and Economic growth

Human resources refer to the quantity and quality of labour

inputs
The quantity of human resources refer to the labour supply
The quality of the labour resources depend on education,
skills, discipline motivation etc

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Human Resources and Economic growth

Human resources refer to the quantity and quality of labour

inputs
The quantity of human resources refer to the labour supply
The quality of the labour resources depend on education,
skills, discipline motivation etc
Many economists believe that the quality of labour inputs is
the single most important element of economic growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Capital and Economic growth

Capital includes
tangible capital goods like roads, power plants
equipment and machines like trucks and computers
intangible goods like computer software

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Capital and Economic growth

Capital includes
tangible capital goods like roads, power plants
equipment and machines like trucks and computers
intangible goods like computer software
One of the important stories of economic growth in the recent
times is rapid accumulation of capital

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Capital and Economic growth

Capital includes
tangible capital goods like roads, power plants
equipment and machines like trucks and computers
intangible goods like computer software
One of the important stories of economic growth in the recent
times is rapid accumulation of capital
Accumulation of this capital requires sacrifices of current
consumption over many years
this means higher savings that used to finance investment that
builds up this capital

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Capital and Economic growth

Capital includes
tangible capital goods like roads, power plants
equipment and machines like trucks and computers
intangible goods like computer software
One of the important stories of economic growth in the recent
times is rapid accumulation of capital
Accumulation of this capital requires sacrifices of current
consumption over many years
this means higher savings that used to finance investment that
builds up this capital
Therefore, the savings rate is a key determinant of economic
growth in many models of economic growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Natural Resources and Economic growth

Important natural includes arable land, oil, gas, forests, water

and mineral deposits

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Natural Resources and Economic growth

Important natural includes arable land, oil, gas, forests, water

and mineral deposits
Some currently developed countries have grown primarily on
the basis of their ample resource base
prime examples are Canada and Norway

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Natural Resources and Economic growth

Important natural includes arable land, oil, gas, forests, water

and mineral deposits
Some currently developed countries have grown primarily on
the basis of their ample resource base
prime examples are Canada and Norway
However, as the example of many African countries show,
possession of abundant resources is neither necessary nor
sufficient for economic success

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Technology, innovation and Economic growth

Technological change denotes changes int he processes of

production or introduction of new products and services

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Technology, innovation and Economic growth

Technological change denotes changes int he processes of

production or introduction of new products and services
Technological change promotes growth by enhancing
productivity
process inventions such as steam engine, internal combustion
engine, microprocessor greatly increased productivity

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Technology, innovation and Economic growth

Technological change denotes changes int he processes of

production or introduction of new products and services
Technological change promotes growth by enhancing
productivity
process inventions such as steam engine, internal combustion
engine, microprocessor greatly increased productivity
According neoclassical growth models, technological progress
is the main source of sustained long-term growth in living
standards

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Technology, innovation and Economic growth

Technological change denotes changes int he processes of

production or introduction of new products and services
Technological change promotes growth by enhancing
productivity
process inventions such as steam engine, internal combustion
engine, microprocessor greatly increased productivity
According neoclassical growth models, technological progress
is the main source of sustained long-term growth in living
standards

Technological progress is however a complex and multifaceted

process and there is not clear formula for acheiving success

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Outline

1 Economic Growth
Meaning of Economic Growth
Importance of long-term Growth
Sources of Economic Growth
Economic growth and income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

When we use per capita income as the yardstick we ignore the

effect of growth on income distribution

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

When we use per capita income as the yardstick we ignore the

effect of growth on income distribution

Not everyone benefits from growth equally because growth is

normally distributed through increased wages and higher
profits;
The poorest who are unemployed therefore do not share in the
growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

When we use per capita income as the yardstick we ignore the

effect of growth on income distribution

Not everyone benefits from growth equally because growth is

normally distributed through increased wages and higher
profits;
The poorest who are unemployed therefore do not share in the
growth

When growth is driven mainly by technological change it leads

to loss of jobs, and thus not everyone shares in the growth

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

Thus we should note that in even in periods of high growth,

the distribution may be unequal

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

Thus we should note that in even in periods of high growth,

the distribution may be unequal

Some will face extreme poverty and hardships and so there

will be need for redistribution policies to avert the hardships

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

Thus we should note that in even in periods of high growth,

the distribution may be unequal

Some will face extreme poverty and hardships and so there

will be need for redistribution policies to avert the hardships

Empirically the relationship between economic growth and

income distribution is not clear

UGBS 204: Lecture two

 Meaning of Economic Growth
Importance of long-term Growth
Economic Growth
Sources of Economic Growth
Economic growth and income distribution

Growth and income distribution

Thus we should note that in even in periods of high growth,

the distribution may be unequal

Some will face extreme poverty and hardships and so there

will be need for redistribution policies to avert the hardships

Empirically the relationship between economic growth and

income distribution is not clear

Redistribution policies are pro-poor policies to make growth

share growth. Here the increment in real GDP is redistributed
through gov’t. intervention

UGBS 204: Lecture two