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ECONOMIC GROWTH

ECONOMIC GROWTH. The Situation. Robinson Crusoe is on a desert island. The island has some goats which will let him milk them. The island has good fishing. RC can divide all the hours he works between fishing and milking goats. Production Possibilities. Production Possibilities.

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ECONOMIC GROWTH

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  1. ECONOMIC GROWTH

  2. The Situation • Robinson Crusoe is on a desert island. • The island has some goats which will let him milk them. • The island has good fishing. • RC can divide all the hours he works between fishing and milking goats.

  3. Production Possibilities

  4. Production Possibilities

  5. Capital and production • Capital are goods produced in the past which are used to produce other goods. • RC’s stock of capital is limited to: • a sharpened stick for fishing. • a bucket he found on the beach to hold the milk.

  6. Economic Growth • RC could produce more if he worked longer hours, but he is exhausted after chasing goats around the mountain and standing by pools with his stick trying to stab fish. • If he had more capital, say fencing for the goats or a net to catch fish, he could produce more without working so hard.

  7. Capital Accumulation • RC could weave a net out of the bark of a tough tree that grows on the island. • If he has a net, he could greatly increase his fish production.

  8. Production with a fish net

  9. Shift in production possibilities

  10. Capital Accumulation • But – RC has to make the nets before he can catch fish with them. • If he is to gather bark and weave nets, he will have less time to chase goats and to fish. • He must shift resources out of production for current consumption and into production for future consumption.

  11. Producing Capital • RC now has a new set of possibilities – he can weave nets. • If he produces no fish, these are his trade-offs.

  12. Cost of Growth • Cost of Capital Accumulation • Resources must be diverted from fishing and milking goats to making nets • Current Consumption must be reduced to produce the capital goods which will increase future consumption.

  13. SUMMARY • Output can increase – the ppb boundary can shift out – only if a society reduces current consumption • We call a reduction in current consumption SAVING. • How hard it is for RC to save depends partly on how hungry he is, and how hard he works to feed himself now.

  14. Technological Change • What about fencing goats? • To fence the goats, RC must cut down trees. He doesn’t have a tool to cut trees. • He suspects could make an axe from the right kind of stone, or perhaps sharpened shells on the beach. • He needs to spend time to learn how to make an axe.

  15. Technological Change • We could look at a PPB for research and development of an axe and other productive activities… but you probably get the picture. • Technological change results in large part from time and effort spend learning better production methods.

  16. GROWTH • Economic growth requires a reduction of consumption in the present as resources are shifted into producing capital goods or improving technology. In the future, we can have more of both consumption and capital goods.

  17. If in Year One you produce 500 capital and 500 consumer goods in year two the PURPLE line will be the ppf Year Two. If in year one you produce 1100 capital and 300 consumer goods in year two the RED line will be the ppf Year Two. GROWTH

  18. Economic Growth • Through time, societies grow partly by accumulating capital. With more capital equipment (machines, newly discovered resources, educated human beings) we can expand production. • If resources are devoted to R&D we can learn better ways of making goods, and also expand production. Coal electric plants can be replaced with wind mills.

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