Briefly explain why initial levels of GDP might influence subsequent economic growth.
Q1
(A) Briefly explain why initial levels of GDP might influence subsequent economic growth.
Economic growth is reflected by an overall improvement in the quality of life in a given country. This may include better health care, a cleaner environment and more freedom in terms of choosing work and leisure activities. During times of economic growth, the overall wealth of a country increases, as do the variety and abundance of goods and services.
Economic growth is not easy to measure. A widely used for economic growth is changes in real gross domestic product (GDP) per capita, the final sales of goods and services in a country per person, adjusted for inflation. Economists track real GDP per capita over time to compare growth among countries and the effects of various factors of economic growth
Consider the effects of an increase in real GDP. Such an increase represents economic growth. Thus, the study of the effects of a real GDP increase is the same as asking how economic growth will affect interest rates.
Economic Growth is an increase in the real level of national output as measured by the annual percentage change in real GDP. It is also defined as a long-term expansion of the productive potential of the economy.
Real GDP measures the value of goods and services produced within the economy adjusted for the effects of inflation. If national output falls we are in an economic recession. If real GDP starts to rise, then the economy is in a recovery phase. An economic slowdown means that the pace of growth is falling - but the economy is still expanding.
The production function is a technical relationship that shows the maximum amount of output that can be produced using specified quantities of inputs given existing technology. It could be expressed formally as:
Y = f (K, L)
Where Y is potential output or GDP; K is the number of physical capital units; L is the number of labour units; the f, function never changes.
And if we use a small amount of them it will be the marginal production high .so a country with a low level of GDP has the potential to achieve fast rates of growth because small changes in the level of national output will be high percentage increases. The coefficient on initial level of GDP measures the percentage rate of
Convergence to the economys long run or target level of income. The interpretation is that initial income has a negative impact on residual growth. So the higher the initial income is the closer to the technological leader and the lower will growth be. Economic growth is the engine through which increases in living standards are generated. The growth of GDP in relation to the growth of the population provides a measure of changes in a country's living standards. GDP per capita could be taken as a measure of a country's productivity although it is more appropriate to express it in per worker terms Economic growth is related to shifts in the aggregate supply of the economy and therefore related to the growth of potential output. The main increases in potential output are attributable to changes in factor supplies like capital and labour and to changes in their productivity.
(B) Using SPSS comment on the statistical association between the initial GDP level and subsequent growth for both period.
bit fit for the graph
Regression
Variables Entered/Removed(b)
Model
Variables Entered
Variables Removed
Method
GDP1950(a)
.
Enter
a All requested variables entered.
b Dependent Variable: rategrowth50to73
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
.868(a)
.753
.742
.80357
a Predictors: (Constant), GDP1950
ANOVA(b)
Model
Sum of Squares
df
Mean Square
F
Sig.
Regression
45.227
45.227
70.040
.000(a)
Residual
4.852
23
.646
Total
60.078
24
a Predictors: (Constant), GDP1950
b Dependent Variable: rategrowth50to73
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
(Constant)
6.686
.339
9.749
.000
GDP1950
-.001
.000
-.868
-8.369
.000
a Dependent Variable: rategrowth50to73
this is the first graph and bit fit and regression for the fist period from 1950 to 1973
bit fit for the graph
Regression
Variables Entered/Removed(b)
Model
Variables Entered
Variables Removed
Method
GDP1973(a)
.
Enter
a All requested variables entered.
b Dependent Variable: rategrowth73to99
...
This is a preview of the whole essay
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
(Constant)
6.686
.339
9.749
.000
GDP1950
-.001
.000
-.868
-8.369
.000
a Dependent Variable: rategrowth50to73
this is the first graph and bit fit and regression for the fist period from 1950 to 1973
bit fit for the graph
Regression
Variables Entered/Removed(b)
Model
Variables Entered
Variables Removed
Method
GDP1973(a)
.
Enter
a All requested variables entered.
b Dependent Variable: rategrowth73to99
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
.827(a)
.684
.670
.81133
a Predictors: (Constant), GDP1973
ANOVA(b)
Model
Sum of Squares
df
Mean Square
F
Sig.
Regression
32.720
32.720
49.708
.000(a)
Residual
5.140
23
.658
Total
47.860
24
a Predictors: (Constant), GDP1973
b Dependent Variable: rategrowth73to99
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
(Constant)
5.886
.512
1.489
.000
GDP1973
.000
.000
-.827
-7.050
.000
a Dependent Variable: rategrowth73to99
the second graph and bit fit and regression for the period from 1973 to 1999
The graphs show a strong inverse relation ship between initial GDP level and subsequent growth for 1950 and1973, and the GDP level and subsequent growth for 1973 and 1999, but not for the later period, at least among the more developed economics.
The earlier period is indeed one where growth performance was dominated by catch up. This suggestion that some of Germanys superiority in TEP growth relative to the UK in those year is explained by is initially larger productivity gap between and greater scope for catch up. Its very important to normalize for these differences in evaluating growth performance the first growth regression equations is (1950 to 1973) Y = a + b x
Y =6.68 + -.001 realGDP
And R is .868 where is R squared is .753
And the growth regression equations is (1973 to 1999) is
Y = a + b x
Y = 5.88 +-.000 real GDP
And R is .827 where is R squared is .684
R squared helps us to describe how will regression line fit the data. And how closely the points lie around the regression line. And the value of R squared between 1 to 0,
There also seem to be evidence of under performance by the UK in that its growth was appreciably slower than that of many countries with similar initial income level. This was confirmed formally by a regression of growth rates across European regions which took account of initial income levels and employment structure and found that, controlling for these factors UK growth was about .5 percentage points lower than
elsewhere in Europe. Rapid catch up growth was transitory and had greatly diminished by the 1980 when the productivity gap had become much lower. Through the past second world war period labour productivity growth in both the UK and Germany has exceed that of earlier years. This has reflected both more investment and faster technological change in societies which were devoting far more resources t education and research and development than they had in the 1990s and twentieth centuries. The decline in TEP growth in 1973 to 1999 in all three countries in the table is probably exaggerated by the increasingly problematic measurement of real GDP growth. If we look at Japan the GDP is 1926 (1950) and the growth rate is 8 whereas the GDP is 11439 in 1973 and the growth is 2.3. So I observe that if initial GDP is small the growth is high and vice versa. Another example Italy GDP in 19503502 and growth 5 whereas the GDP in 1973 is 10643 and the growth 2 and Spain GDP in 1950 is 2397 and the growth is 5.8 whereas the GDP in 1973 is 8739 and the growth is 2, so there are negative relation ship between the GDP and the growth rate.
Q2
Discuss the source of growth and government policy to influence the growth rate. Write an essay not more 800 words.
Solow model of growth was first devised by Nobel Prize winning Economist Robert Solow more than 40 years ago. The model believes that a sustained increase in capital investment increases the growth rate only temporarily: because the ratio of capital to labour goes up, but the marginal product of additional units of capital is assumed to decline and the economy eventually moves back to a long-term growth path, with real GDP growing at the same rate as the workforce plus a factor to reflect improving "productivity.
A "steady-state growth path" is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker are constant. The models economists believe that to raise an economy's long-term trend rate of growth requires an increase in the labour supply and an improvement in the productivity of labour and capital. Differences in the rate of technological change are said to explain much of the variation in economic growth between developed countries. The model treats productivity improvements as an "exogenous" variable meaning that productivity is assumed to be independent of capital investment.
Endogenous growth economists believe that improvements in productivity can be linked to a faster pace of innovation and extra investment in human capital. Endogenous growth theorists stress the need for government and private sector
institutions and markets which nurture innovation, and provide incentives for individuals to be inventive. There is also a central role for knowledge as a determinant of economic growth, Endogenous growth theory predicts positive externalities and spillover effects from development of a high valued-added knowledge economy, which is able to develop and maintain a competitive advantage in growth industries in the global economy.
The main points of the endogenous growth theory are as follows:
- The rate of technological progress should not be taken as a given in a growth model appropriate government policies can permanently raise a country's growth rate particularly if they lead to a higher level of competition in markets and a higher rate of innovation.
2- there are potential increasing returns from higher levels of capital investment.
3- Theory emphasizes that private investment in R&D is the central source of technical progress.
4- Protection of property rights and patents can provide the incentive to engage in R&D.
5- Investment in human capital (education and training of the workforce) is an essential ingredient of growth.
In the recently developed new growth theories, human capital is a separate factor of production. Such growth theories have mathematical formulae, which describe how economic activity generates human capital for human capital. For example, an individual's human capital is simply his or her general skill level, so that a worker with human capital h is the productive equivalent of two workers with human capital h/2. The percentage growth of human capital per annum is proportional to the percentage of non-leisure time devoted to human capital accumulation.
The role of government in the process should not be overlooked. Firstly, the government provides the legal framework for the enforcement of contracts and the protection of property rights. Secondly, they provide infrastructure in terms of roads, bridges, and harbors etc., which facilitate economic activity, trade and subsequently growth. Thirdly, they invest in health to ensure that the country's stock of human capital is protected from depreciation and in education to ensure that both quantity and quality is increased. Fourthly, they invest and fund R and D activities both within universities and in private companies. Institutions that evolve to deal with recurrent problems are also important. Fifthly they should impose tax to make control to the market, and if the investment is high it should enforce a low interest rate. However, the most interesting thing about these growth models is what they have to say about the patterns of future global economic development. First of all, unlike technology in the Solow growth models, "human capital" is not freely transferable across national boundaries. Since human capital is a critical determinate of the growth rate, in many of these models, growth in the developed and undeveloped economies need never converge, and it is entirely possible for an economy to permanently experience a greater rate of growth the greater its level of development. Furthermore, it can do this in the presence of a "fixed factor" such as a fixed population or an environmental constraint.
Q3
Policy intervention to try to achieve an environment sustainable economy see markets both as the cause of the problem and as part of the solution. Explain and critically discuss this statement. Your answer not exceeds 1250 words.
Sustainable development is development that's met the need of the present without compromising the ability of future generations to meet their own needs. Sustainable development is development that generates current human well being without imposing extra costs in future. Sustainable development is development that secures an increase in the well being of the current generation without decreasing the well being of future generation. This effectively takes the same form as the Brundltald definition but sustainable welfare for needs. If it accepted as a worthwhile social goals, sustainable development implies that development should be distributed evenly across the generation, this doesn't mean that economic progress is sacrificed so that each generation is guaranteed equal levels of well being. What it means is that progress today must not be reversed at a future date. The way in which the current generation is using the environment may entail large costs being passed on the future. In this sense, we may be buying our development at the expense of our descendant. The suggestion that this is not an acceptable trade off raises philosophical issues concerning fairness or justice, which are not easy to resolve.
Sustainable development is therefore based on concept intergenerational justice that refers to the distribution across generation. This is distinct from distribution within a generation problems also impose significant costs on the present generation, and raise their own question of intergenerational justice, for example, pollutants emitted from power stations, such as sulphur dioxide (so2), generate significant current costs in terms of their adverse effects on human health.
Technological progress expands the opportunities open to the future, enhancing the production and consumption possibilities of an economy by raising the productivity of capital. This reduces the onus on the current generation to pass on the future as much capital as it inherited. It also raises another possibility. Environment capital which ecological economic and others suggest is a unique provider of certain benefits, may not be seen in this way in the future because of the development of substitute goods or substitute process made possible by technological breakthroughs.
If environment resources are been used up, such as capacity of the atmosphere to absorb co2 without climate change, this particular environment endowment will decrease. Consequently there is less to be passed on to future generation, which decrease the economic opportunities open to future generation to meet their development goals. It also contradicts the Pareto principle if it is extended to consider future generation. A gain in current well being at the expense of future well-being is not an improvement by Pareto criterion. The concept of intergeneration justice underpins the arguments for sustainable development, and hence the arguments for climate change abatement policies, this concept has been debates at length by philosophers, political scientist, economist and environmentalist. This is particularly
relevant to global warning, s global climate change would continue for 70 years, as a consequence of past emission, even if co2 emission ceased today. Climate change abatement is therefore inescapably altruistic, and intended to benefit people who do not yet exist.
Some commentators have raised the issue of uncertainty and set it against the equal consideration of future welfare, the current generation doesn't know what future generation will want; so discounting future benefits may be a reasonable response to this uncertainty. Discounting is a technique for comparing the worth of goods and ads that occurs at different times by expressing future benefits and costs in terms of an estimate of their present value, uncertainty about what future generation will want could be a reason for preferring current benefits over future benefits that are, at the time they occur of the same magnitude.
A concern for the well being of future generation and a sense of the intrinsic value of the non human world are both excluded from consideration in the market process, where the competitive process operate to induce innovations that in many cases cause environment degradation, clearly future generation cannot themselves that is agent because they d not yet exist. Any part of non human environment that is not someone property, for example, the atmosphere is vulnerable to environment damage, if it is not owned by anyone, using it does not entail having to pay and so it may easily become an apparently free receptor of waste products or pollution. The significance of creating markets as a policy response to climate change is associated with the role of competition in reducing costs and hence making compliance Kyoto more politically acceptable .the clean development mechanism CDM allows an industrial country to earn credits towards, it's a emission reduction targets by investing in an emission reducing project in a low income country, the idea behind emission trading is hat an industrial country can increase the maximum level of GHG emissions , its allowed during asset period by buying an used allowances from another industrial country. There is also the fear that the sacrifice will be futile if emission from low-income country, increase on a business as usual basis. A serious problem with carbon trading is that government intervention is required to define property right, that is to set the targets for GHG emission reduction for each country and hence the number of permits that can be issued. Without property right, there is nothing to be exchanged.
It seems that there are two reasons for being skeptical about the benefits of market; first, the argument for market reducing costs and achieving a locative efficiency is based on the model of perfectly competitive markets. Second, there is a nature of the costs to be reduced. You might have felt that the political rather that the economic nature of the US costs of abatement undermines its case. In the other hand, it could be argued that political resistance in the USA to GHG emissions reduction program is the most serious obstacle to climate change abatement, the economic case for emission trading rests in part on the reduction of the costs of abatement precisely because lower cost would make an agreement on a GHG emission reduction program more politically acceptable.
A sustainable economy would be one in which economic activity is organized in recognition of these limits. It is unlikely that such on economy could be constructed on the foundations of contemporary market norms and behaviors. Market can contribute most effectively to climate change policy by being used to achieve objectives set through the political process.
Section :202
Tutor :Draimah Al-Otaibi
TMA 06 DD202
