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.
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...