IBE303 - Lecture 2 - July 5th, 2010

1. Lecture 2 Growth Theories July 5th 2010 Saksarun (Jay) Mativachranon

2. Intro Please turn your mobile phones off or switch it to silent modeand please do not pick up your calls Email: saarkman@gmail.com

3. Recap

4. 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)

5. 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

6. 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

7. Incentive System for economic growth 3 Social institutions that are critical for incentives development Markets Property rights Monetary exchange

8. 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

9. Economic growth

10. Labor Productivity What is Labor Productivity? Real GDP per labor hour 2 factors drive Labor Productivity Physical capital per labor hour Technological change

11. Productivity Curve Real GDP per labor hour More Technology LP3 Less Technology LP2 LP1 C1 C2 Capital per Labor Hour

12. Productivity Slowdown 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

13. 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

14. Growth theories

15. The 3 popular theories Classical Growth Theory Neoclassical Growth Theory New Growth Theory

16. 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

17. Classical Growth Theory

18. 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

19. Neoclassical Growth Theory

20. New Growth Theory Basic idea Discoveries of products and technologies are the result of luck Discoveries lead to profit Competitions eliminate profit

21. New Growth Theory

22. New Growth TheoryPerpetual Motion Economy

23. Thailand economic growth Example

24. 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

25. 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%

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

27. Next Week Regulation and Antitrust Policy in Globalized Economy Trade Theories