Growth Theories and Policies New growth theories Real GDP per person grows because of choices that people make in the pursuit of profit and growth can persist indefinitely. Technological change is driven by profit incentives Knowledge is a public good and there may be increasing returns to knowledge (education) Achieving Faster Growth Growth accounting tell us that to achieve faster economic growth we must either increase the growth rate of capital per hour of labor or increase the pace of technological change. Stimulate Saving Saving finances investment. So higher saving rates might increase physical capital growth. Tax incentives might be provided to boost saving. Growth Theories and Policies Stimulate Research and Development Because the fruits of basic research and development efforts can be used by everyone, not all the benefit of a discovery falls to the initial discoverer. So the market might allocate too few resources to research and development. Government subsidies and direct funding might stimulate basic research and development. Patents can provide incentive to innovate. Growth Theories and Policies Growth Theories and Policies Encourage International Trade Free international trade stimulates growth by extracting all the available gains from specialization and trade. The fastest growing nations are the ones with the fastest growing exports and imports. Improve the Quality of Education The benefits from education spread beyond the person being educated, so there is a tendency to under invest in education.
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