Growth Theories & Models

Background

Goal of any economic model is higher economic growth.

Some of the most important aspects in macroeconomics

• economic growth
• Aim: maximum economic output at stable prices
• Living standards
  • Consider this example¹
    • India is the 5th largest economy (nominal), 3rd in terms of PPP (real)
    • But in terms of per-capita income, we are $\approx$ 114th largest

Growth is important (necessary) but it is not enough (sufficient) for a nation’s welfare.

• Think about ceiling on desires²

Growth rate is:

$$\frac{\Delta y}{Y}=\frac{y_t-y_{t-1}}{y_{t-1}}$$

Growth Theories

• Supply side factors
• Def. of Average Demand is absent
• Rate of Growth of Economy should be greater than Rate of Growth of Population

Three factors that drive economic growth

1. Quality performance (Productivity)
2. Quantitative → K, L,…
3. Both Qualitative and Quantitative³

Early views of Economic Growth

Adam Smith

• Division of labor to improve specialization
  • Onion cutting example in hostel
  • Cost comes down
  • More work gets done at the same cost

Ricardo & Maltose

• Stationary state⁴

Economic growth & Environment

Green GDP: $\text{Nominal GDP}-\text{Damage done to nature}$

• most of it is on paper
• no real development observed in the world (our lecturer was a student when he first heard about this, now he is teaching us the same, while we hear it like how he did)

In a crude way, research happens just to say that another factor is significant in the model. Much of the work has already been done and its just a marginal improvement.

Footnotes

1. Growth doesn’t tell you about living standards. Though growth can be helpful to improve it. ↩

2. Ceiling for desires means, you are earning but not consuming everything for yourself, but using it for charity. ↩

3. Because of various substitution effects in both capital and labor. ↩

4. It is like the natural rate theory. ↩