Macroeconomics

Van Quy NGUYEN

Data Science program - NEU

2023

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 Chapter 5: Economic Growth

Definition and measurement of growth

Determinants of economic growth
Economic policies to promote growth

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Economic Growth

Vietnam’s GDP Rises by 344% Since 1996

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Economic Growth

An economic growth rate is the percentage change in the

value of all of the goods and services produced in a nation during
a specific period of time, as compared to an earlier period.

In most cases, the economic growth rate measures the change in

the (real) gross domestic product (GDP).

The gross national product (GNP) may be used in all those

nations with economies heavily dependent on foreign earnings

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Measurement of growth
Annual growth rate of output (%):
GDPt − GDPt−1
gt = × 100
GDPt−1
Annual growth rate of GDP per capita (%)
GDPPt − GDPPt−1
gt = × 100
GDPPt−1
Average Annual growth rate (%)
g1 + g2 + · · · + gt
AAGRt =
t
Compound Average growth rate (%)
1 !
GDPt t

CAGRt = − 1 × 100
GDP1
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Example: GDP Vietnam

Year GDP (billion USD)

2008 99.13
2009 106.01
2010 147.20
2011 172.59
2012 195.59
2013 213.71
2014 233.45
2015 239.26
2016 257.09
2017 281.35
2018 310.11
2019 334.36
2020 346.62
2021 366.14
2022 408.80

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Rule 70

Double growth: is the cumulative growth in many years

Rule of 70 explains: If GDP grows by g%/year, it will get double
value after 70/g years.

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Example

1. If CPI increases at 3% monthly, calculate the year’s inflation

rate?
2. Your parents saved $10,000 at the interest rate 3% when you
were borned. How much do you have when you are 70 years old?

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 Time for World GDP per capita to double
1000 - 1500 500 years
1500 - 1700 200 years
1700 - 1820 120 years
1820 - 1870 50 years
1870 - 1913 43 years
1913 - 1950 37 years
1950 - 1965 15 years
1998 - 2010 12 years

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Convergence

Convergence in economics is the hypothesis that poorer

economies’ per capita incomes will tend to grow at faster rates
than richer economies.
This is the process by which poorer countries close the gap with
richer countries in term of real GDP per capita.
Example: Japan and Asian Tigers
In the last 20 years, there has been little convergence. For
example, Parkistan, Sudan, and South Africa.

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 Determinants of economic growth

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 Theories of economic growth

Adam Smith (1776): Natural Resources and Labour

Keynes (1940): Physical Capital
Neo-Classical (1950s): Technology
...

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Natural Resources
Natural resources are those resources derived from nature that
people can utilize and which exist irrespective of human actions.
Natural resources can also be classified as renewable or
non-renewable:
Renewable resources: Oxygen, wind, freshwater, sunlight, and
forests. These are not depleted indefinitely when consumed or
used.
Non-renewable resources: Fossil fuels, metal ores, groundwater
(occasionally), and numerous Earth minerals.

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 Countries with the most natural resources (2021)

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Natural Resources
The impact of natural resources on economic progress is still a
hotly debated topic in scientific circles.
The significance of the political regime plays an important role
in the link between economic development and the use of
natural resources.
In short term, natural resource has good effects on economic
growth. For example, the oil-rich countries of the Middle East
have decent living standards, and some countries has high living
conditions like Qatar or United Arab Emirates.
However, many researchers believe that natural resource
dependence, in the long term, will harm a nation’s economic
development.
Such a phenomenon has its own name – the “paradox of plenty”
(aka the “resource curse”). For example, Dutch disease, Angola
oil,
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Human capital

Human capital refers to the knowledge, skill sets, and

experience that workers have in an economy..
These skills provide economic value since a knowledgeable
workforce can lead to increased productivity.
Human capital and economic growth have a strong correlation.
Human capital affects economic growth and can help to develop
an economy by expanding the knowledge and skills of its people.
Most rich countries such as Japan, Korea, Singapore and others
have a well-educated and skillful labor force.

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Physical Capital

Physical capital consists of tangible, human-made objects that a

company buys or invests in and uses to produce goods.
Physical capital items, such as manufacturing equipment, also
fall into the category of fixed capital, meaning they are reusable,
and not consumed during the production process.
Physical capital is important because it increases productivity,
affects economic growth and potential output

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Technological Innovation

Technological innovation describes the development and

application of ideas and technologies that improve goods and
services or make their production more efficient.
A classic example of innovation is the development of steam
engine technology in the 18th century. S
More recently, information technology transformed the way
companies produce and sell their goods and services, while
opening up new markets and new business models.
Innovation can lead to higher productivity, meaning that the
same input generates a greater output. As productivity rises,
more goods and services are produced – in other words, the
economy grows.

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Others factors

Demographics: demographics change the employment to population ratio as

well as the labor force participation rate. The age structure of the
population affects the labor force participation rate.
Labor force participation: the rate of labor force participation impacts
economic growth. When manufacturing increased, it created a higher
productivity rate, but lowered the labor force participation, prices fell, and
employment shrank
Inequality: inequality in wealth and income has a negative impact on
economic growth. Inequality results in high and persistent unemployment.
This has a negative effect on long-run economic growth
Trade: international trade represents a significant part of GDP for most
countries. It is the exchange of goods and services across national borders
Quality of life: happiness has been shown to increase with a higher GDP per
capita. Consistent quality of life leads to continued economic growth

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Growth accounting method

Total Output: Y = f (A, K , L, R, ...)

Solow’s model, it’s Cobb-Douglas function Y = AK α L1−α .

gy = gA + αgK + (1 − α)gL

Solow has found that Technology contributed 80% to the US

economy’s growth from 1909 to 1949, while Capital and Labor
contributed only 20%.

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 Contribution to GDP growth in Vietnam

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 Contribution to GDP growth in US

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 Contribution to GDP growth in China

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 Policies for Economic Growth

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Policies for Economic Growth

Domestic saving and investment

Investment from abroad
Direct foreign investment: FDI
Indirect foreign investment: FII / FPI
Education and training
Property and Ownership Protection
Free trade
Population control
Investment in education and medical system
R & D activities
Protect property rights and promote political stability

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Policies for Economic Growth

Domestic saving and investment → K

Investment from abroad → K
Direct foreign investment: FDI
Indirect foreign investment: FII / FPI
Education and training → L
Property and Ownership Protection → K, L
Free trade → TFP
Population control → L
Investment in education and medical system → L
R & D activities → TFP

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 GDP and FDI growth rates in South Africa.

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 GDP and FDI growth rates in Vietnam.

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 GDP growth rate and Trade.

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 Highest growth rate of ASEAN
https://www.youtube.com/watch?v=9elaWquhWf0

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