Lecture 2Growth TheoriesJuly 5th 2010Saksarun (Jay) Mativachranon

Intro

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•Email: saarkman@gmail.com

Recap

Economic Growth

•Measured by Real GDP▫Real GDP indicates the rate of economic

growth but NOT the changes in standard of living

•Standard of living is measured by Real GDP per person (per capital real GDP)

Sources of Economic Growth

•Simple concept▫The amount of goods that can be produced

with each unit of input▫Inputs is generally referred to as “Factors

of production” Land Capital Goods Labor Entrepreneurial ability

Example of growth factors• Land – all natural resources

▫Easy to obtain resources equal more production (efficient)

• Capital goods – goods that are used in productions▫China’s supporting industries result in growth the

past decade• Labor

▫Longer working hours or higher productivity equals higher output

• Entrepreneurial ability▫Companies able to put Land / Capital goods / Labor

to good use resulting in higher output

Incentive System for economic growth•3 Social institutions that are critical for

incentives development▫Markets▫Property rights▫Monetary exchange

Key Learning Points

•You should be able to;▫Effect from changes in sources of economic

growth▫Compare and Contrast

Classical Growth Theory Neoclassical Growth Theory New Growth Theory

Economic growth

Labor Productivity

•What is Labor Productivity?▫Real GDP per labor hour

•2 factors drive Labor Productivity▫Physical capital per labor hour▫Technological change

Productivity Curve

Capital per Labor Hour

Real GDP per labor hour

Less Technology

More Technology

C1

C2

LP1

LP2

LP3

ProductivitySlowdown Speedup

• Technology is applied to deal with issues not related to productivity

• Encourage saving leads to capital accumulation

• Encourage Basic R&D▫ Basic research results in

low ROI, this policy is usually from government induced

• International trade• Education

Economic Growth

•In order for economic to continue growing, societies must encourage▫Savings and investment in new capital▫Investment in human capital▫Discovery of new technologies

Growth theories

The 3 popular theories

1. Classical Growth Theory2. Neoclassical Growth Theory3. New Growth Theory

Classical Growth Theory

Basic Idea▫The growth of real GDP per person is

temporary Real GDP growth leads to population growth

(explosion)▫Real GDP grows above subsistence level

due to population explosion▫Population growth leads to decline in real

GDP Back to subsistence level

Classical Growth Theory

Neoclassical Growth Theory

Basic Idea▫Changes in technology lead to increased

saving and investment increased capital per labor hour

▫Technological growth is not influenced by economic growth Technological advances occurs by trial and error

▫Growth will decline if Technology stops advancing Real interest rates decrease due to capital

accumulation

Neoclassical Growth Theory

New Growth Theory

•Basic idea▫Discoveries of products and technologies

are the result of luck▫Discoveries lead to profit▫Competitions eliminate profit

New Growth Theory

New Growth TheoryPerpetual Motion Economy

Competition

Lower Profit

Innovation

Higher Profits

Thailand economic growthExample

Thailand’s Economic Structure

•Still an “emerging economy”•Heavily dependent on exporting

▫Over 2/3 of GDP came from exporting•Well-developed infrastructure•Free-enterprise economy•Generally pro-investment policies

Questions

•How are we doing right now?▫1st quarter +12%▫2nd quarter -1.5%

•What’s in store for us in 3rd and 4th quarter?▫Expert still predicts +3.5% to +4%

Real GDP Growth

Real GDP Growth:2009: -2.8%2008: +2.6%2007: +4.6%

Next Week

•Regulation and Antitrust Policy in Globalized Economy

•Trade Theories