Factors for Economic Growth

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Growth Rate Of Money Supply Equals Growth Rate Of Real Gdp Formula
Growth Of Real Gdp
Growth Rate Of Money Supply Equals Growth Rate Of Real Gdp Per
Growth Rate Of Money Supply Equals Growth Rate Of Real Gdp As A

Notice that if the growth rate of the nominal money supply is equal to growth rate of money demand then inflation is equal to zero. Now money demand grows over time primarily because the real economy grows over time (average real growth is about 2.5% per year on average). In words, under the assumptions of constant income and velocity, the price level is proportional to the money supply, or equivalently, the growth rate of money supply equals the inflation rate. The ideal GDP growth rate is between 2% and 3%. The current GDP rate is 6.4% for the first quarter of 2021, which means the economy grew by that much between January and March 2021. The growth signals partial recovery from the downturn seen in Q2 of 2020. The GDP growth rate measures how healthy the economy is. In general, when the GDP growth rate shows rising economic productivity, the value of money in circulation increases. This is because each unit of currency can subsequently be exchanged for more. The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals A) 0. B) the growth rate of real GDP.

Now we are going to look at what factors matter for economic growth. Real GDP grows when the quantities of the factors of production grow or when persistent advances in technology make them increasingly productive. Our standard of living improves only if growth occurs because of increases in labor productivity. ⁽¹⁾

Labor Productivity

Labor productivity is the quantity of real GDP produced by one hour of labor.

Labor productivity = (Real GDP) ÷ (Aggregate hours worked)

Real GDP = (Aggregate hours worked) x (Labor productivity)

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Note: Using the rearranged formula shows that growth in Real GDP can be divided into growth in aggregate hours worked and growth in labor productivity.

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Growth (A x B) is approximately = Growth A + Growth B

The growth of labor productivity is influenced by saving and investment in physical capital, expansion of human capital, and discovery of new technologies. More saving and investment in physical capital increases labor productivity. The law of diminishing returns states that if the quantity of capital is small, an increase in capital brings a large increase in production; and if the quantity of capital is large, an increase in capital brings a small increase in production. This fact about capital means that saving and investment in additional capital will not bring sustained economic growth without an accompanying expansion of human capital and technological change.

Expansion of human capital : Human capital is the accumulated skills and knowledge of people. Human capital is the most fundamental source of economic growth because it directly increases labor productivity and is the source of the discovery of new technologies. Human capital comes from education and training, job experience, and health and diet.
Discovery of new technologies : New technologies increase labor productivity. Often these new technologies require new and better capital, such as personal computers replacing typewriters. ⁽¹⁾

Economic Growth Theories: Old and New

Old Growth Theory

An old growth theory is the classical growth theory . This theory predicts that the clash between an exploding population and limited resources will eventually bring economic growth to an end. According to this theory, labor productivity growth will increase real GDP per person above the subsistence level, which will bring a population explosion. Eventually, the population growth will decrease capital per worker hour and labor productivity will fall and real GDP per person will return to the subsistence level. Malthusian theory is another name for classical growth theory — named after Thomas Robert Malthus . Malthus predicted that population growth would result in people having a primitive standard of living at the subsistence level of real GDP per person. ⁽¹⁾

New Growth Theory

New growth theory is the theory that our unlimited wants will lead us to ever greater productivity and perpetual economic growth.

The new growth theory emphasizes the role played by choices and innovation. It emphasizes three key aspects of market economies:

Human capital grows because of choices.
Discoveries result from choices.
Discoveries bring profit, and competition destroys profit.

Once a new discovery has been made, it can be used by everyone. In addition, production activities can be replicated so that identical firms can each produce the same quantity of an item and so the economy does not suffer from diminishing returns. Economic growth is driven by insatiable wants, which lead us to pursue profit and to innovate. The new and better products mean that old firms go out of business. New firms start up, which creates new and better jobs and leads to greater consumption and leisure. But insatiable wants simply start the growth cycle all over again. ⁽¹⁾

Preconditions for Economic Growth

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Three necessary preconditions for economic growth are:

Economic freedom is a condition in which people are able to make personal choices, their private property is protected, and they are free to buy and sell in markets. What countries are considered economically free? Who is in control of economic decisions? Are people free to do what they want and to work where they want? Are businesses free to produce when they want and what they choose, and to hire and fire as they wish? Are banks free to choose who will receive loans? Or, does the government control these kinds of choices? Each year, researchers at the Heritage Foundation and the Wall Street Journal look at 50 different categories of economic freedom for countries around the world. They give each nation a score based on the extent of economic freedom in each category. The 2013 Heritage Foundation’s Index of Economic Freedom report ranked 177 countries around the world: some examples of the most free and the least free countries are listed i

Growth Rate Of Money Supplyequals Growth Rate Of Real Gdp