Economic Growth and Public Policy.

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Economic growth and public policy

To increase productivity and living standards, governments can can: 1. Encourage saving and Investment: Goal: invest more current resources in the production of capital to increase physical capital (K). Trade-off: The opportunity cost of investment is that someone must forgo current : consumption in order to save and invest sumption Note that: because of diminishing returns, an increase in the saving rate leads to higher growth of productivity and income only for a while. In the long run, higher saving rate leads to a , higher level of productivity and income but not to a higher growth of productivity and ductivity income. Policies: - Saving incentives: lowering taxation on savings will increase saving The quantity of : saving. loanable funds (supply) will increase and the equilibrium interest rate will fall (see supply/demand for loanable funds). Result : higher saving and investment pply/demand - Investment incentives: lowering taxation for firms that build a new factory or buy new equipment for example will increase investment (demand for loanable funds) and the equilibrium interest rate will rise. Result: higher saving and investment. Result:

Debate: Some economists argue that such policies to encourage investment policies would have no effect in an economy where there is already unused (idle) capacity due to uncertainty and lack of business and consumption. In such situation, more efficient policies would be to encourage consumption and lower uncertainty ( uncertainty (Keynesian economists). 2. Encourage investment from abroad Goal: increase physical capital (K) without being limited by savings of domestic residents. Policies: increase incentives through lower taxation, low uncertainty, low levels of corruption corruption, securing property rights, maintaining political stability etc stability, 3. Encourage education and training Goal: increase productivity by increasing human capital (H) Trade-off: when students are...
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