ECONOMIC

GROWTH AND
DEVELOPMENT
DEVELOPMENT ECONOMICS
 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

Lesson: Development Economics

Title: Economic Growth

and Development

Group Members:

Jiallian Mae Geodisico

Katrina Joy Rejoy

Euanne Joyce M. Rivera

Ellah Mae A. Vila

 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

Introduction

People always wonder why we should know the importance of studying our
economy. By studying the economy of a certain nation, it influences everything not
just economic issues but also influence our daily lives. Economics affects our daily
lives in both obvious and subtle ways. From an individual perspective, economics
frames many choices we have to make about work, leisure, consumption and how
much to save. Our lives are also influenced by macro-economic trends, such as
inflation, interest rates and economic growth. There are two important concepts that
we should always consider in learning the economy. The economic growth and the
economic development.

The economic growth refers to an increase in the production and consumption of

goods and services over time. On the other hand the economic development
encompasses a wider range of factors, including social welfare, equality, and
sustainability. While growth focuses on income and output, development considers
long-term improvements in quality of life and living standards. The economic growth
brings quantitative changes in the economy and reflects in the per capita income of
the country. This further improves the facilities and opportunities provided to the
people of the country, resulting in overall development of the nation.

Learning Objectives/Outcomes
 Develop the ability to explain core economic terms, concepts, and theories.
 Analyze the Solow’s Growth Model such as the Assumptions, and
Implications.
 Determine how consumer spending and business investment are key drivers
of economic growth, and how they influence human capital.
 Discuss the role of technology and the relationship between technology and
economics, which bring new opportunities and challenges to economic growth
and development.

Discussion
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Polytechnic University of the Philippines
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Solow’s Growth Model

The Solow Growth Model is an exogenous model of economic growth that

analyzes changes in the level of output in an economy over time as a result of
changes in the population growth rate, the savings rate, and the rate of technological
progress.

The Solow Growth Model, developed by Nobel Prize-winning economist Robert

Solow, was the first neoclassical growth model and was built upon the Keynesian
Harrod- Domar model. The Solow model is the basis for the modern theory of
economic growth.

Simplified Representation of the Solow Growth Model

Assumptions:

1. The population grows at a constant rate g. Therefore, the current population

(represented by N) and future population (represented by N’) are linked through the
population growth equation N’ = N(1+g). If the current population is 100 and its
growth rate is 2%, the future population is 102.

2. All consumers in the economy save a constant proportion, ‘s’, of their incomes and
consume the rest. Therefore, consumption (represented by C) and output
(represented by Y) are linked through the consumption equation C= (1-s)Y. If a
consumer earns 100 units of output as income and the savings rate is 40%, then the
consumer consumes 60 units and saves 40 units.

3. All firms in the economy produce output using the same production technology
that takes in capital and labor as inputs. Therefore, the level of output (represented
by Y), the level of capital (represented by K), and the level of labor (represented by
L) are all linked through the production function equation Y = aF(K,L).

The Solow Growth Model assumes that the production function exhibits constant-
returns-to-scale (CRS). Under such an assumption, if we double the level of capital
stock and double the level of labor, we exactly double the level of output. As a result,
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much of the mathematical analysis of the Solow model focuses on output per worker
and capital per worker instead of aggregate output and aggregate capital stock.

4. Present capital stock (represented by K), future capital stock (represented by K’),
the rate of capital depreciation (represented by d), and level of capital investment
(represented by I) are linked through the capital accumulation equation K’= K (1-d) +
I.

Solving the Solow Growth Model

1. In our analysis, we assume that the production function takes the following form: Y
= aKbL1-b where 0 < b < 1. The production function is known as the Cobb-Douglas
Production function, which is the most widely used neoclassical production function.
Together with the assumption that firms are competitive, i.e., they are price-
taking firms, the coefficient b is the capital share (the share of income that capital
receives).

2. Therefore, output per worker is given through the following equation: y =

akb where y = Y/L (output per worker and k = K/L (capital stock per worker)

3. Under the assumption of competitive equilibrium, we get the following:

The income-expenditure identity holds as an equilibrium condition: Y = C + I

Consumer’s budget constraint: Y = C + S

Therefore, in equilibrium: I = S = sY.

4. The capital accumulation equation becomes: K’ = (1–d)K + sY

The capital accumulation equation in per worker times is given through the following
equation: (1 + g)k’ = (1 – d)k + sy = (1 – d)k + saf(k) = (1 – d)k + sak b
 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

5. The solution concept used is that of a steady state. The steady state is a state
where the level of capital per worker does not change. Consider the graph below:

6. The steady state is found by solving the following equation: k’ = k => (1 + g)k = (1
– d)k + sakb

7. Therefore, the steady state value of capital per worker and the steady state value
of output per worker are the following:
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Implications of the Solow Growth Model

There is no growth in the long term. If countries have the same g (population
growth rate), s (savings rate), and d (capital depreciation rate), then they have the
same steady state, so they will converge, i.e., the Solow Growth Model predicts
conditional convergence. Along this convergence path, a poorer country grows
faster.

Countries with different saving rates have different steady states, and they will not
converge, i.e. the Solow Growth Model does not predict absolute convergence.
When saving rates are different, growth is not always higher in a country with lower
initial capital stock.

Human Capital and Economic Growth

Human capital refers to the knowledge, skill sets, and

experience that workers have in an economy. The skills provide economic
value since a knowledgeable workforce can lead to increased productivity. The
concept of human capital is the realization that not everyone has the same skill sets
or knowledge. Also, the quality of work can be improved by investing in people's
education.

Economic growth is an increase in an economy's ability, compared to past

periods, to produce goods and services. Economic growth is measured by the
change in the gross domestic product (GDP) of a country. GDP is a representation
of the total output of goods and services for an economy. For example, if a country
has a GDP rate of 2.5% for the year, it means the economic growth of the country
rose by 2.5% from a year earlier.

Two Key Drivers of Economic Growth

In order to determine how human capital impacts growth, we must first look at two
key drivers of economic growth in an economy: consumer spending and business
investment.
 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

Consumer Spending

As consumers become employed or experience wage increases, they tend to

increase their purchases of clothes, cars, technology, homes, and home goods such
as appliances. All of that spending creates a positive ripple effect leading to
improved employment in various industries such as retail, auto manufacturers,
technology stores, and home builders, to name a few. The spending also leads to
higher GDP growth throughout the economy.

Business Investment

The increased GDP growth from consumer spending leads to improvements in

business conditions. As companies become more profitable, they tend to invest more
money into their businesses to create future growth. Business investment can
include new equipment and technology purchases. The investments businesses
make are called capital investments. Capital investments, which require large outlays
of capital or cash, are designed to boost a company's productivity and profits in the
long term.

Investments in Human Capital

Human capital is positively correlated to economic growth since investment tends

to boost productivity. The process of educating a workforce is a type of investment,
but instead of capital investment such as equipment, the investment is in human
capital.

Government Investment

The role of governments is key to expanding the skillsets and education levels of
a country's population. Some governments are actively involved in improving human
capital by offering higher education to people at no cost. These governments realize
that the knowledge people gain through education helps develop an economy and
boost economic growth. Workers with more education or better skills tend to have
higher earnings, which, in turn, increases economic growth through additional
consumer spending.
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Polytechnic University of the Philippines
Mulanay, Quezon Campus

Corporate Investment

Companies also invest in human capital to boost profits and productivity. For
example, let's say an employee working at a technology company receives training
to be a computer programmer through on-site training and in-house seminars. The
company pays for a portion of the tuition for higher education. If the worker remains
at the company after the training has been completed, they may develop new ideas
and new products for the company. The employee might also leave the company
later in their career and use the knowledge they learned to start a new company.

How Education Increases Economic Growth

Investing in workers has had a track record of creating better employment

conditions in economies throughout the world. If employment is improving, consumer
spending rises, leading to increased revenue for companies and additional business
investment. As a result, employment is a key indicator or metric for determining how
GDP growth may perform.

The Organization for Economic Co-operation and Development (OECD) is a

group of more than 30 member countries that help to shape and develop economic
and social policies across the globe.

OECD routinely analyzes the impact of education levels on employment and

ultimately, economic growth. The OECD's 2022 annual Education at a Glance report
reviewed how education systems operate, the level of spending, and who benefited
or participated.

The OECD also measures how increases in education for men and women drive
employment growth. Organization for Economic Co-operation and Development.
"Education at a Glance 2022," Page 78.

The OECD found that in 2021, countries with people who had grammar and high
school educations experienced an employment rate among 25-34 year-olds of 83%
for men and 67% for women. However, those who had college or graduate education
levels experienced an employment rate of 88% for men and 82% for women.
 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

Although investment in human capital tends to produce more growth, it doesn't

necessarily mean the jobs are available for the newly-educated workers. Also,
geography plays a role when it comes to job openings and the movement of labor. If
job openings are located in the northern part of a country, but the skilled labor is in
the south, growth could be hindered due to the cost of moving or the lack of desire
to move.

Why Does Human Capital Matter to an Economy?

The knowledge, skills, and creativity of a company's human capital is a key driver of
productivity. Developing human capital allows an economy to increase production
and spur growth.

What Are the Economic Benefits of Human Capital?

Investing in human capital tends to increase innovation, boost production, and

improve profitability, all of which lead to economic growth.

What Are the Benefits of Economic Growth?

With economic growth, production increases, which in turn increases the demand for
labor, decreasing unemployment. It also tends to decrease poverty and improve the
standard of living.

OECD. "Building Jobs and Prosperity in Developing Countries," page 3.

The Bottom Line

Human capital refers to the knowledge, skills, and abilities of workers. Overall, an
economy tends to grow when it invests in the development of its people. Economic
growth in turn tends to lift more people out of poverty and improve living conditions.

Role of Technology

Technology has witnessed impressive

evolution in the past few decades, which
has in turn transformed our lives and
helped us evolve with it. Right from
roadways, railways, and aircraft for
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Polytechnic University of the Philippines
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seamless travel to making communication effortless from any part of the world,
technology has contributed more than anything to help mankind live a life of luxury
and convenience.

It is also because of technology that we know our world and outer space better.
Every field owes its advancement to technology, and this clearly indicates the
importance of technology in every aspect of our lives, including the highest paying
tech jobs. In the upcoming sections, we elaborate on the importance, benefits, and
impact of technology. It is impossible to exaggerate the significance of technology in
today's fast-paced world on all fronts. The way we work, communicate, and solve
complicated problems has changed dramatically as a result, making technical
proficiency and digital literacy more important than ever.

Technology is the key driver of economic growth and development. It allows for
the more efficient production of more and better goods and services, which is what
prosperity depends on. Technology also facilitates the utilization of resources, saving
on time and labor, boosting research and international trade, and leading to the
expansion of industries. Countries that invest in the changing environment can
benefit from technology3. The level of technology is an important determinant of
economic growth.

The relationship between technology and economics will continue to evolve in the
future. Emerging technologies, such as artificial intelligence and blockchain, promise
to bring new opportunities and challenges.

These technologies could further boost productivity and create new markets.
However, they could also lead to job displacement and increased economic
inequality. Policymakers and businesses must be proactive in addressing these
challenges to ensure that the benefits of technology are broadly shared. The role of
technology in economics is multifaceted and complex. It has the potential to drive
economic growth and create new opportunities, but it also poses significant
challenges. Policymakers, businesses, and individuals must navigate these
challenges to harness the full potential of technology for economic prosperity.
 Republic of the Philippines
Polytechnic University of the Philippines
Mulanay, Quezon Campus

As we conclude, it's clear that technology plays a critical role in shaping our
economic landscape. It's a powerful tool that, when wielded correctly, can propel
economic growth, spur innovation, and create new opportunities. However, it also
presents challenges that require thoughtful solutions. As we move forward, the
dance between technology and economics will continue to evolve, and we must be
ready to adapt to its rhythm.

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 Republic of the Philippines
Polytechnic University of the Philippines
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https://youtu.be/eVAS-t83Tx0?si=UPqAERwbdJ2TLDT-
Physical Capital and Diminishing Returns
https://youtu.be/SljsIacQDbc?si=Qs9VAh10WwLJ5XAK
The Solow Model and the Steady State
https://youtu.be/LQR7rO-I96A?si=5jYc4W8wsJWS-hNz
Human Capital & Conditional Convergence
https://youtu.be/SVWX4Xjl4Os?si=EqHXQUNAhngWqFT-
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https://youtu.be/-yPDlowSL1w?si=uTGe0R4tKspPC7X6
Office Hours: The Solow Model
https://youtu.be/p32tHlm2R8U?si=K1u_BKhfnhpPGlK6
Introduction to the Solow Growth Model (ep. 1)
https://youtu.be/E3Niu4E1kbI?si=yG6GepMFwa43TQWN
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https://youtu.be/xjoG3KSOulo?si=ZzFxNyolTFSanIFQ’
Technology, Innovation and Inclusive Growth
https://youtu.be/mtXUtX0c1YE?si=K0Dl1PvHtrBH6fmo
Technology and Economic growth
https://youtu.be/qw011kSq3UU?si=PgiF8z33bdvTsVKS