Economic Growth

Parcial 1 Historia Económica

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ECONOMIC GROWTH: Long-process of sustained increase in the level of real income per capita in a certain economy.

Differences of extensive and intensive growth: Whereas extensive growth is achieved using more resources which make us get more output, intensive growth is issued as a result of (for example: technological advances)

Extensive growth: Output rises because use of inputs increases.

Intensive growth: Output rises because any given combination of inputs is used more efficiently.

GDP: Gross Domestic Product: Total expenditure on domestically products, final goods and services. / Total income earned by domestically-located factors of production.

GDP-Intuition: The circle of Economic Activity: The money moves circularly. Product Market → Businesses → Factor Markets → Individuals

Advantages of GDP:

1. Intuitive

2. Objective

3. Available for most countries

4. Earlier periods estimation

5. Accurate

Disadvantages of GDP:

1. Does not consider distribution of income

2. Does not account for quality of life

3. Fails to include goods/services which are not traded in the market

4. Completely ignores what kind of goods and services (weapons)

Alternatives:

* Human Development Index (HDI) → Definition: A long a healthy life, being knowledgeable and having a decent standard of living.

* Inclusive Wealth Index (IWI) → Manufacture capital, human capital and natural capital.

* Indirect Indicators: Anthropometric measures (height and weight), educational indicators (scholarship), age heaping (people always put the age like 05 due to lack of education), population and settlement data.

CONVERGENCE: In your own words, briefly define the concepts of strong/absolute and weak/conditional convergence

Weak/conditional convergence implies that poorer countries grow faster on average than richer ones, however as it is also conditional, this means that this convergence will never reach other countries growth as the convergence is determined by the particular factors of each country. So if two countries do not have identical factors, their convergence will not be the same.

Strong/absolute convergence implies that all countries in the world will end up having the same economic level in the long-run and as it is strong, it requires to have more equal income levels over time.

DIVERGENCE: There is no convergence

Explain, why there was a potential for convergence between the industrial forerunner England and the European followers. (Hint: You might want to use the theory of extensive/intensive growth and diminishing marginal returns).

There was a potential for convergence because England was experiencing intensive growth since 1800 thanks to the Industrial Revolution and the use of specialized machines, the introduction of Fordism in the production chain, the increase in technologies... The majority of the resources were already exploited and an increase in productivity was the only solution when willing to grow more.

On the contrary, European countries, whose Industrial Revolution had not takenplace yet, had the potential to grow at a faster rate because of the law of diminishing returns: they would be able to catch up England’s level with an extensive growth, as resources in these countries were not still exploited.

What is the diminishing Marginal Product of Labour?

Once you increase labour (inputs) it reaches a point where there is no additional output. This is the problem of extensive growth. What anyone can produce is lower. If I am using 1000 machines, the machine 1001 will produce less in comparison. There is also diminishing marginal product of land. The more you use a land (more intensively) it requires more time to recover.

Malthusian trap

First candidate explanation: Population dynamics, i.e. the Malthusian model. If economic growth is largely extensive, population growth might “eat up” increases per-capita growth.

P.O. Population

Output

Demographic/Malthusian Crisis