L13 - Classical Model of Economic Growth

Question 1

What’s the definition of Economic Growth?

Answer 1

Rate of change in real GDP per capita over long period of calendar time.

Question 2

What are the 4 points about the definition of Economic Growth?

Answer 2

1. Interested in Real GDP growth. Measures quantity of goods and services produced
2. Interested in per capita terms
3. Long periods considered (7-10 years) since econ growth trying to measure growth in economy productive cycle
4. Must be measured from same point in business cycle (peak to peak etc.) to avoid exaggerations

Question 3

What is the UK’s growth experience?

Answer 3

-Until the 18th century there was no economic growth.

1700-1750 – 0.6% pa and 0.24% per capita pa

1750-1776 – 1.0% pa and 0.38% per capita pa

1776-1800 – 2.8% pa and 0.53% per capita pa

Question 4

Who are the main classical theorists?

Answer 4

Started with Adam Smith (1723-1790)

• Malthus (1766-1834)
• Ricardo (1772-1823)
• Marx (1818-1883)

Question 5

What is Smith’s 3 prerequisites for econ growth?

Answer 5

1. Security of property for supply of effect and capital
2. Control of primogeniture (inheriting land from father etc.)
3. Infrastructure to be provided by the state

Smith also believed in division of labour

Question 6

How does the Division of Labour increase output?

Answer 6

1. Dexterity of workforce improves with practise
2. Time saved moving between tasks
3. Machinery can be employed

• Division of labour led to higher productivity increased output and capital accumulation
• As capital grew wages roses followed by pop. Increase and demand grew.
• Causing chain reaction
• For Smith all sectors harmonious

Question 7

What is the Problem with Smith’s theory?

Answer 7

• View that extra population leading to extra output. But doesn’t actually generate more output per head.

• i.e India GDP twice as big as Sweden’s but pop. 80 times larger so India relatively worse off
• Explains protests of mass migration

Question 8

What’s Malthus’ theory of population?

Answer 8

• Assumed pop grew geometrically (2,4,8,16,32 etc.)
• But food grew arithmetically (1,2,3,4,5 etc.)
• Unless pop growth is checked population outgrew supply of food
• Pop had to be restrained below its limit. Checks on birth rate and death rate. Such checks included moral restraint, vice (birth control) and misery (starvation)

DIAGRAM ON NOTES

Question 9

What is Ricardo’s theory of growth?

Answer 9

• Based on his theory of rent.
• His view of growth depends on repeal of Corn Laws (imports of corn banned)
• Capital accumulation led to increased output.
• Increased output led to an increase in population growth and higher demand for food.
• Due to the scarcity of fertile land, less fertile land would be brought into production, so the price of food and rents would rise
• Wages would rise – to prevent starvation - and so with higher rents and wages profits would fall. Until no profits made and growth ceases.

DIAGRAM ON NOTES

Question 10

What is Marx’s theory?

Answer 10

Wrote in the midst of the industrial revolution so saw things a little different

• Fast Growth led to poor living standards
• Worst effect was child labour
• Used same model as Ricardo’s but to show how the profits were the result of capitalists exploiting workers. Wages as low as possible for higher profits
• Capitalists buy labour value (subsistence wages) but workers may produce output above what they paid for. Resulting in more profit for the capitalists (Surplus value)
• Assumed organic composition of capital- ratio of fixed capital (machinery) basically people get replaced by machines
• Due to competition the ones that remain become bigger and richer as strong firms take over the weak: and so industrial concentration rises
• Capitalists tried to increase the rate of exploitation by: innovation; increasing the length of the working day; and pushing down wages. The result was a rise in the “industrial reserve army” of the unemployed.
• Mechanisation causing a deterioration in working conditions
• Conflict is between the workers and the capitalists
.

Question 11

What is the Evidence for Marx’s theory?

Answer 11

Worked for time period he was talking (1830’s and 1840’s) e.g. hand-loom weavers wages fell from £1.15 per week in 1805 to 41p in 1818 and to 30p by 1831, due to the introduction of power looms

But after 1850 real wages began to rise and working conditions improved. Factory Act 1833 – no child under 9 yrs to be employed; The Reform Act 1867, Education Acts 1870

So, social revolution Marx thought would happen never happened.