Development and economy

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FIRST CHAPTER: ECONOMIC GROWTH, AN INTRODUCTION

What’s the goal of economic agents?
3types of agents: households, firms and governments.
For households: Higher economic growth leads to higher wages (if correctly distributed) which leads to higher consumption. So economic growth for households is a way to increase their consumption.
Firms aim at doing high profits, and higher economicgrowth leads to higher profits.
For the government, a high growth helps to reduce or cut down fiscal debt because it allows government to increase taxes or to reduce expenses.

I/ INTRODUCTION
Usually growth is seen as the solution for our problems: for a developed country it will allow to reduce/lower unemployment or to balance budget. For developing countries it may allow to reduce poverty andincrease the welfare (depends on consumption).
Usually growth is a cumulative process, growth calls for growth.
There are 2 main measures for growth :
* Real GDP : allows to eliminate the price effect ( inflation) on growth
Real GDP = Nominal GDP – Prices because Real growth rate = Nominal growth rate – Inflation
* GDP/ capita : used to see the real wealth of a country per inhabitantbc the GDP of China is far more higher than the GDP of Luxembourg but the GDP/capital is larger in Luxembourg than in China allows to eradicate the size effect.

A MADDISON, studied many indicators of growth and he found that real economic growth in Africa was about 2.74% / year whereas the population growth (n) was about 2.73% : the real growth/capita was almost 0%. So you have to compare theprogression of growth to the pace of progression of the population.

1) The main phases of World Economic Growth ( WEG)
“During the last thousand years population was multiplied by 13, GDP/capita by 22 and GDP by 300.”
Why 13x22 isn’t equal to 300, whereas it should be ? Because an approximation by log is used. When analyzing macroeconomic figures, you should be very careful becauseapproximations are often used. From year 0 to year 1000: population rose by 15.5% whereas the GDP didn’t progress.

However during the last thousand years, it’s only since 1820 that economic growth started to be effective. The economic growth rate was about 0.2% in the 19th century ant then started to accelerate.

Periods | WEG (%) | Growth of GDP | Growth of Pop° | Growth GDP/Capita |1820-1870 | | 1.0 | 0.3 | 0.6 |
1870-1913 | | 2.1 | 0.8 | 1.3 |
1913-1950 | | 1.9 | 0.9 | 0.9 |
1950-1973 | | 4.9 | 1.9 | 2.9 |
1973-1998 | | 3.0 | 1.7 | 1.2 |
Average | | 2.2 | 1.0 | 1.2 |

We can emphasize 5 economic phases since 1820:
* It corresponds to a period when western economies build their industries. World GDP growth is low since a major part of the world has still notgrown. There is an ascending face ( economic growth for many years) in 1770 to 1816 an another one from 1847 to 1873. The 1st one is due to the steam machine (machine à vapeur). The 2nd ascending face within the same cycle is due to the discovering of the railroad, but it was a very fluctuating period marked by the 1st crisis of industrial capitalism in the western world. Economic growth startsappearing in other regions which allows GDP to increase.
* From 1896 to1920 the major innovations were cars and electricity.
* Then the economic growth is negative, because it was affected by the 2 WWar and the great depression.
* The 4th period is the period with the higher expansion of EG (+4.9%) in the world, in all the OECD countries, it’s the Trente Glorieuses and the majorinnovation is Fordism and the beginning of mass consumption. The Breton woods agreement also helped.
* The 5th period : EG is not as high as before but is still more important than the average for the last 2 centuries.

Economic growth is something about long term, policy (fiscal , monetary) can influence and inhance EG but it could not produce it. In order to have a long term growth you need a...
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