Unit 6

Economic Growth

• Sustained increase in Real GDP over time
• Sustained increase in  Real GDP per Capita over time

Why Grow?

• Growth leads top greater prosperity for society
• Lessens the burden of scarcity
• Increases the general level of well-being

Conditions for growth

• Rule of Law
• Sound legal and economic institutions
• Economic Freedom
• Respect for Private Property
• Political and Economic Stability
• Low inflationary expectations
• Willingness to sacrifice current consumption
• Saving 
• Trade

Physical capital

• Tools, machinery, factories, infrastructure
• Physical capital is the product of investment
• Investment is sensitive to interest rates and expected rates of return
• It takes capital to make Capital
• Capital must be maintained

Technology and Productivity

• Research and development, innovation and invention yield increases in available technology
• More technology in the hands of workers increases productivity
• Productivity is output per worker
• More productivity = Economic Growth

Human Capital

• People are a country's most important resource.  Therefore human capital must be developed.
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean water
• Stable food supply
• Access to technology

Hindrances of Growth

• Economic and Political Instability
• High inflationary expectations
• Absence of the Rule of Law
• Diminished Private Property rights
• Negative Incentives
• The welfare state
• Lack of savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding out of investment
• Government deficits and debt increasing long-term interest rates
• Increased income inequality --> Populist policies
• Restrictions on Free International Trade