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1 Economic Growth and Development

The document discusses the concepts of economic growth and development, highlighting that economic growth refers to the increase in a nation's per capita GDP, while economic development focuses on improving living standards. It outlines various factors influencing economic growth, including investment, education, health, property rights, and technology, as well as models like the Solow Model and O-Ring Theory that explain growth dynamics. Ultimately, it emphasizes the importance of technological advancement and skilled workforce in achieving sustained economic growth.

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elora villalon
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14 views21 pages

1 Economic Growth and Development

The document discusses the concepts of economic growth and development, highlighting that economic growth refers to the increase in a nation's per capita GDP, while economic development focuses on improving living standards. It outlines various factors influencing economic growth, including investment, education, health, property rights, and technology, as well as models like the Solow Model and O-Ring Theory that explain growth dynamics. Ultimately, it emphasizes the importance of technological advancement and skilled workforce in achieving sustained economic growth.

Uploaded by

elora villalon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Introduction to

Economic Growth and


Development
“Economic Growth”

refers to the percentage change in


a nation’s per capita GDP- the
money value of all goods and
services produced over time.
“Economic Growth” boosts the national output,
the total money value of all goods and services
produced by one country,

whereas, “Economic Development” means


advancement of standard of living, e.g.,
education, healthcare, innovation, environment,
to name a few.

Growth directly boosts development; all other


things remain constant, higher GDP means
higher development.
Factors Infl uencing Economic Growth

Saving and Investment: Investment in


capital is essential for increased production.
Higher savings rates can lead to more
investment, reducing unemployment and
poverty.

Diminishing Returns and Catch-Up Eff ect:


As capital stock increases, the additional
output from each new unit decreases.
Countries with less capital have the potential
to grow faster by investing more.
Factors Infl uencing Economic
Growth

Investment from Abroad: Foreign


investment brings capital and can
lead to increased production and
opportunities.

Education: Human capital, which is


improved through education, is
crucial for a more productive
workforce.
Health and Nutrition: A healthy
population is more productive,
contributing to economic growth.

Property Rights and Political


Stability: Secure property rights and
political stability reduce uncertainty and
encourage investment.

Free Trade: Reduced trade restrictions


enable countries to benefi t from
international markets.
Research and Development
(R&D): Innovation through R&D
generates new ideas, goods,
and services, which are
essential for growth. R&D
translates knowledge into
business opportunities.

Population Growth: A large


population can contribute to
production but also increases
consumption.
Productivity

In production, we consider the


factors such as quantity of labor
(L), quantity of capital (K),
quantity of human capital (H),
quantity of natural resources
(N), and technological advances
(T).
To summarize, the output of
production (Y)
Y= Tf (L, H, N).
O-RING THEORY OF DEVELOPMENT

O-Ring theory of economic development was proposed by


economist Michael Kremer in 1993, which explains that
production is composed of set of tasks, and each task
must be carried out profi ciently for each one of the tasks
have value.

The theory tells us that a weak link in the production


process may cause a surmountable quality failure of the
fi nal output. The quality of input is given more value than
its quantity.
• To grow, countries
need to improve the
skills of their workforce
across the board.
• Investing in education
and training is crucial.
• Attracting skilled
individuals can create
a positive cycle of
development.
SOLOW Model

One of the most popular models that is used to


understand long-term economic growth is the used of
Solow Model. The model was developed by Robert Solow,
an American Economist and Nobel Prize winner in
Economic Sciences.

The Solow Model explains how economies grow over


time. It focuses on how capital, labor, and technology
contribute to economic development.
The Basics of the Solow Model

1.What drives growth?

Capital: Things like machines, factories, and tools that workers


use to produce goods.
Labor: The number of workers and how much eff ort they put in.
Technology: Innovations and improvements that make workers
and machines more productive.
factories) and improves technology, workers can produce more,
which leads to economic growth.
However, adding more capital (e.g., more factories or machines)
only increases production up to a point.
2. How does growth happen?

• When a country invests in capital (like building


more factories) and improves technology, workers
can produce more, which leads to economic
growth.

• However, adding more capital (e.g., more factories


or machines) only increases production up to a
point.
Ideas of the Solow Model

1.Diminishing Returns to Capital:


⚬ Imagine a farmer using shovels to plant crops. The fi rst
shovel is very helpful. Adding a second shovel helps a
bit more, but adding a 10th shovel doesn’t make much
diff erence. The same happens with capital—adding more
has less impact over time unless technology improves.
2.Steady State:
⚬ Economies eventually reach a point where the extra
capital no longer increases output signifi cantly. This is
called the “steady state,” where growth slows down
unless something changes.
Ideas of the Solow Model

1.Diminishing Returns to Capital:


⚬ Imagine a farmer using shovels to plant crops. The fi rst
shovel is very helpful. Adding a second shovel helps a
bit more, but adding a 10th shovel doesn’t make much
diff erence. The same happens with capital— adding more
has less impact over time unless technology improves.
2.Steady State:
⚬ Economies eventually reach a point where the extra
capital no longer increases output signifi cantly. This is
called the “steady state,” where growth slows down
unless something changes.
Ideas of the Solow Model

3. Role of Technology:

• The model emphasizes that long-term growth comes from


better technology (like new inventions or more effi cient
ways of working), not just adding more capital or labor.

4. Saving and Investment:

• Countries that save and invest more in capital grow faster


initially but will still hit the steady state. Long-term growth
depends on technological progress.
If you still don’t understand, here’s an analogy for you :)

If you add more workers (labor) and machines (capital),


you can make more toys. But at some point, the factory
gets crowded, and adding another worker or machine
doesn’t help much.

To make more toys in the long run, you need better


technology (like an automated assembly line).
Calculate for the Net export, GDP, and GNP.

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