Chapter 11
Economic growth and
Economic cycle
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00
Topics to be Discussed
? 11.1 Summary
?Initial research about the economic growth
?The definition about the economic growth
?Weighing standard about the economic
growth
?Headspring of the economic growth
?Economic growth and economic
development
Topics to be Discussed
? 11.2 Classical growth theory
?Basic supposition
?Harrod—— Domar growth model
? 11.3 New classical economic growth theory
? 11.4 Economic cycle
? 11.5 Explanation of the economic cycle
11.1 Summary
?Definition about the economic growth
?The growth about the ability of producing
goods and labor services in one country。
?The long-term rise in supplying the residents
increasing economic products,
11.1 Summary
? Weighing standard about the economic growth,
? GDP can not be regarded as the economic growth
rate,because,
? （ 1） price；
? （ 2） population change；
? （ 3） potential,not real；
? （ 4） can not reflect the welfare increasing,environment
pollution,
11.1 Summary
? Headspring
? Denison?s seven factors,
? Supply increase in the producing elements,
labour element
（ 1） employment number and age and sex structure
（ 2） working hours
（ 3） education years
capital elements （ 4） the total capital
?productivity increase （ technology progress）
（ 5） effectiveness of resources collocation
（ 6） scale economy
（ 7） knowledge development
11.1 Summary
? Economic increase and economic
development
? Economic Growth,is defined that the increased percentage
about the relative comparison between current GDP
and the former GDP
? Economic Development,is the result of the continuing
economic growth,
1
1
?
????
t
tt
Y
YY
Y
Y
11.2 Classical Economic Growth Theory
? Basic Presumption
Y(GDP)
t
Long-term growth trend,
upward inclined curve
indicates the continuing
increase in the potential
producing ability,In the
short term it can be a little
deviated,such as A。
Two coefficients can be
used to describe,slope,
intercept。
A
B C
11.2 Classical Economic Growth Theory
? Presumption 1
? The number of the labour is increased in exponential form；
? Lt,labour is the function of the time；
? L0, labour radices；
? e, natural logarithm；
? gL, labour growth rate
tg
t
LeLL,
0?
11.2 Classical Economic Growth Theory
? Presumption 2
? Technology progress can be expressed by the
“Effective Labor Units”；
? Et, Effective Labor Units；
?, technology progress coefficient
tg
0
ttg
0
t
tt
L
L
eL
eeL
eLE
)( ?
?
?
?
?
?
?
?
11.2 Classical Economic Growth Theory
?Presumption 3
?GDP is the function of labour and
capital；
0;0
0;0
),(
2
2
2
2
?
?
?
??
?
?
?
?
?
?
??
?
?
?
?
K
F
F
K
F
F
L
F
F
L
F
F
KLFY
KKK
LLL
11.2 Classical Economic Growth Theory
? Presumption 4
? Income equals to payout；
? Social gross saving is effectively used to invest；
? The change of the interest can be effectively used to adjust
save, investment,taxes and government purchase
GITS ???
11.2 Classical Economic Growth Theory
? supposition5
? In the period of t,saving rate is constant to be s；
?St is a part of the gross products,and is determined
by the saving rate；
?The total save equals to the investment, It ；
?In every period the It is the change of capitals。
dt
dK
IsYS ttt ???
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model
? Basic supposition
? Labour and capital can be substituted by each other；
? One unit of product needs a unit labour and v unit
capital
},m in {
v
KL
Y ttt
?
?
11.2 Classical Economic Growth Theory
L
K
v Y1
Y2
Y3
e1
e2
e3
B
A
?v
?Isoquant curve in the product function,
?
11.2 Classical Economic Growth
Theory
? Harrod—— Domar growth model,
? Equilibrium point,e1,e2,e3
? Product level,Y1,Y2,Y3
? Equilibrium condition,the ratio of capital and labour
equals to 。
??
v
L
KL
v
K
t
ttt ?? 或,
?v
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
? The relationship between the gross product and
investment under the given saving rate,
dt
dI
sdt
dY
I
s
Y tt
1
1
?
?
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
?Suppose that the capital is completely
used,
t
t
t
I
vdt
dK
vdt
dY
dt
dK
vdt
dY
v
K
Y
11
1
??
?
?
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
?Deduction,
tIvdt
dI
sdt
dY 11 ??
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
? Gross product and investment must increase simultaneously
through defining the investment growth rate,product
growth rate,growth rate can be determined by the saving
rate and the coefficient v
tI
dtdII ??
tt sYvIvdt
dY 11 ??
v
s
Y
dtdYY
t
???
v
sYI ?? ??
? Harrod—— Domar growth model,
? Defining the labour growth rate
? The gross product under potential employment,
L
t
gL dt
dL
L ??
?
?
t
t
LY ?
11.2 Classical Economic Growth Theory
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
? Gross product must increase with labour simultaneously in
order to attain this condition
? The gross product growth rate must coordinate with the
saving rate and labour growth rate in order to fully using the
total capital and labour in one economy,namely,
L
t
g
L
dt
dL
L ??
?
Lgv
s ?
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
? conclusion,Harrod——Domar growth model
indicates how to fully use the equilibrium
condition,which point out the inner relationship
among capital coefficient v,saving rate and
labour growth rate
? ? ?
?
L
L
g v s
g v s
Effective labour,
Absolute labour,
11.2 Classical Economic Growth Theory
? Harrod—— Domar growth model,
?disadvantages,
? Three coefficients are exogenous,v,s,gL
? Once deviated from the equilibrium growth path,
there will be no self-adjusting mechanism
20
32
25
30 60
PF0
PF0
Technology change effect
Total capital growth effect
rea
lG
DP
/ h
ou
r (1
99
2d
oll
ar)
Capital/hour (1992dollar) 0
11.2 Classical Economic Growth Theory
11.3 New Classical Economic
Growth Theory
? supposition1
?Labour and capital can be substituted by
each other to some extent,namely K/L is
not a fixed coefficient,
11.3 New Classical Economic
Growth Theory
K1 K2 K3
y3
y3
y1
1/v1 1/v2 1/v3
f(k)
11.3 New Classical Economic
Growth Theory
? supposition2
?Product function
)()1,( kfLKFLYy ???
11.3 New Classical Economic
Growth Theory
? new classical
economic growth
model
? Defining capital-
product ratio,
? Use logarithm to the
per capita capital,
vK
Y
LK
LY
k
y 1
/
/ ???
LKk
LKk
lnlnln
/
??
?
11.3 New Classical Economic
Growth Theory
? new classical economic growth model
? The growth rate of the per capita capital
???
????? LK
L
dtdL
K
dtdK
k
dtdkk
tt
///
Ltt
t
gLsYI
K
dK ??? ?；
11.3 New Classical Economic
Growth Theory
? new classical economic growth model
? The growth rate of the per capita capital
L
t
t
L
t
t
L
tt
tt
L
t
t
g
k
ksf
g
k
sy
g
LK
LYs
k
g
K
sY
k
??????
??
?
?
)(
/
)/(
11.3 New Classical Economic
Growth Theory
? new classical economic growth model
? We can get the equilibrium condition and the per
capita capital in the equilibrium condition when we
defining the growth rate to be 0 in the equilibrium,
***
*
*
)(
0
)(
t
L
tt
L
t
t
k
s
g
kfy
g
k
ksf
k
??
???
?
11.3 New Classical Economic
Growth Theory
k*
y* f(k)
ksgL
gL/s
11.3 New Classical Economic
Growth Theory
ksgL
0
k0* k1*
y1*
y0*
f(k)
gL/s
ksgL
1
The
influence of
the change
saving rate
to
equilibrium
growth
11.3 New Classical Economic
Growth Theory
sf(k)
ksg
0
L
y*
f(k)
k*
c
i
Investment and
consumption under
the equilibrium
condition
kgL
)()(
)(
kfs1c
L
Ys1
L
C
c
??
?
?
??
11.3 New Classical Economic
Growth Theory
ksg
0
L
y*
f(k)
k*
Income and
distribution under
equilibrium
condition
p
w
ρ
11.3 New Classical Economic
Growth Theory
?Gold rate and the optimal growth path
?The definition of the optimal growth path,
?The equilibrium growth path ensuring the
highest per capita consumption level
11.3 New Classical Economic
Growth Theory
? Under the effective labour,the equilibrium
growth condition should be,
? Defining,per capita effective consumption”,
? ?
? ? ***
*
*
)(
)(
t
L
tt
L
t
t
k
s
g
kfy
0g
k
ksf
k
?
?
?
??
????
?
)()( kfs1Le Cc t ??? ?
11.3 New Classical Economic
Growth Theory
? Absolute per capita consumption under
equilibrium condition,
? The maximum absolute per capita
consumption ?s F.O.C,
? ?? ?** )( kgkfeLCc L*t
t
?? ????
? ?? ?
? ??
??
???
?????
?
?
?
L
*
L
*t
t
*
t*
g)k(f
0g)k(fe
L
c
c
即，
Gold rate
11.4 Economic Cycle
?Economic cycle and economic growth
Same,both are the economic fluctuations centered with the
GDP; both are the extension and development of the theory of
NI determination; both are the long-term and dynamic NI
determination theory
differences,economic cycle is owning to the short-term
fluctuation of the NI caused by the change of AD,The change
of AS will cause the long-term increase of NI,
?Basic conceptions,business cycle,means that the
economy expands or shrink regularly according to the
whole economy development,
?Four steps,flourish,decline,stagnancy and recovery
GNP
O 时间
Potential
GNP
A
B C
D
E
F G H
I
11.4 Economic Cycle
12.00
Per
ce
nt
of
Labo
r Fo
rce
–4.00
–2.00
0.00
2.00
4.00
6.00
8.00
10.00
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
U.S,business cycle（ 1950-1998）
Percentage Change in Real GDP Unemployment Rate Recesssions
?explanation,multiplier-accelerator model
tttt GICY ???
1tt bYC ??
)( 1ttt CCvI ???
tttt Gb v YYvbY ???? ?? 21)1(
11.5 Explanation of The Economy Cycle
suppose,b=0.5,v=1,Gt=1,Y0=0,then C1= I1=0
tttt Gb v YYvbY ???? ?? 21)1(
11.5 Explanation of The Economy Cycle
11.5 Explanation of The Economy Cycle
Multiplier-accelerator interaction
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 t
GDP
?Explanation,multiplier-accelerator model
I??Y??I larger ? ? Y larger? ? economic flourish
?When the product attains a certain level,owning to the
restriction of the social demand and the resources,product is
difficult to increase?I? ?Y larger? ?recession
?When the stagnancy lasts a period of time,the product will
rise ? I ??Y larger? ?economic flourish
11.5 Explanation of The Economy Cycle
Chapter 11
The End
0
10
20
30
40
90 91 92 93 94 95 96 97 98 99 00