Scribd Logo
Upload

Welcome to Scribd!

  • 31 views

    Adam Smith'S Theory of Growth

    Uploaded by

    Jennifer
    1) Adam Smith considered the father of economics, examined factors that increase a nation's wealth in his book "The Wealth of Nations". 2) Smith argued that a nation's wealth comes from the total value of goods and services (output), not just gold or agriculture. Growth increases output, income, wealth and living standards. 3) The key inputs that determine output are land, labor, and capital. Growth occurs as these inputs and their productivity increase over time.

    Copyright:

    © All Rights Reserved
    Download as PPSX, PDF, TXT or read online from Scribd

    Adam Smith'S Theory of Growth

    Uploaded by

    Jennifer
    31 views12 pages
    1) Adam Smith considered the father of economics, examined factors that increase a nation's wealth in his book "The Wealth of Nations". 2) Smith argued that a nation's wealth comes from the total value of goods and services (output), not just gold or agriculture. Growth increases output, income, wealth and living standards. 3) The key inputs that determine output are land, labor, and capital. Growth occurs as these inputs and their productivity increase over time.

    Original Title

    1adamsmithstheoryofgrowth-130924005738-phpapp02.ppsx

    Copyright

    © © All Rights Reserved

    Available Formats

    PPSX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1) Adam Smith considered the father of economics, examined factors that increase a nation's wealth in his book "The Wealth of Nations". 2) Smith argued that a nation's wealth comes from the total value of goods and services (output), not just gold or agriculture. Growth increases output, income, wealth and living standards. 3) The key inputs that determine output are land, labor, and capital. Growth occurs as these inputs and their productivity increase over time.

    Copyright:

    © All Rights Reserved
    Download as PPSX, PDF, TXT or read online from Scribd
    Download as ppsx, pdf, or txt
    31 views12 pages

    Adam Smith'S Theory of Growth

    Uploaded by

    Jennifer
    1) Adam Smith considered the father of economics, examined factors that increase a nation's wealth in his book "The Wealth of Nations". 2) Smith argued that a nation's wealth comes from the total value of goods and services (output), not just gold or agriculture. Growth increases output, income, wealth and living standards. 3) The key inputs that determine output are land, labor, and capital. Growth occurs as these inputs and their productivity increase over time.

    Copyright:

    © All Rights Reserved
    Download as PPSX, PDF, TXT or read online from Scribd
    Download as ppsx, pdf, or txt
    of 12

    ADAM SMITHS THEORY

    OF GROWTH
    Lecture 1

    Adam Smiths model of growth

    Smith considered to be Father of Economics.


    His book: An Inquiry into Nature and Causes
    of the Wealth of Nations. (1776)
    He wanted to examine:

    Why some countries are richer and some


    poorer?
    What are the basic economic factors that can
    increase the wealth of an economy?

    Wealth of a country is not gold as assumed by


    Merchantalists.
    Or agriculture as assumed by Physiocrats.
    9-Jan-15

    P.Panth

    According to Adam Smith:

    Wealth of an economy is the Value of its Total


    Output includes industrial and agricultural
    output.
    Growth increases wealth by increasing total
    output, income and wealth, and standard of
    living.

    How can growth increase?


    - If inputs increase, output will also increase.
    - Three factors (inputs) land, labour and
    capital owned by landlords, workers and
    capitalists.

    9-Jan-15

    P.Panth

    Assumptions:
    Supply of land cannot increase it is finite.
    Labour is available in infinite quantity, so
    wage rate is at subsistence.
    Labour productivity increases through
    a) division of labour, b) increase in K/L
    Investment is endogenous determined by
    savings.
    Market economy with Perfect competition,
    Diminishing returns
    Laissez faire, invisible hand allocates
    resources.
    9-Jan-15

    P.Panth

    Specialisation of Labour

    Labour specialisation increases output, by


    increasing productivity of labour.
    This leads to increasing returns to scale. So
    Growth is self-reinforcing
    He gives the example of a pin factory:

    9-Jan-15

    If each worker produces entire pin, O/L is low,


    one worker produces only 20 pins a day.
    But if there is specialisation, with 18 sub
    processes, output per man increases to 4800
    pins a day!
    P.Panth

    Labour

    specialisation increases output


    because:
    Skill increases with repetition
    Time is saved,
    The worker can innovate and improve his
    performance.

    But increase in labour specialisation


    depends on demand (Market) for the
    product. So Adam Smith states:

    Division of labour must always be limited


    by the extent of the market.
    9-Jan-15

    P.Panth

    Capital Accumulation

    Capital accumulation is crucial for


    economic growth.
    As capital increases, capital per man
    (K/L) also increases, leading to increase in
    labour productivity, and growth.
    Investment capital formation
    Only capitalist class invests.

    9-Jan-15

    Workers receive subsistence wages,


    cannot save,
    Landlords only consume, not save.
    P.Panth

    The Virtuous Cycle

    Capital accumulation increases K/L


    Higher productivity of labour with higher K/L
    Higher productivity leads to higher incomes,
    Higher income leads to increased demand
    and bigger markets,
    Leads to specialisation of labour, with more
    division of labour.
    But more division of labour leads on to higher
    productivity
    This is Smith's Virtuous Circle.

    9-Jan-15

    P.Panth

    Smiths Virtuous Cycle of Growth


    Division
    of
    labour

    Increase
    in K/L

    Increase in
    Output, Income

    Increase in
    Investment
    Market
    increases

    9-Jan-15

    P.Panth

    Stationary State

    Although there are increasing returns to


    labour specialisation, growth cannot go on
    forever. This is because:

    1. Competition for labour increases, as K

    2.
    3.
    4.
    5.
    9-Jan-15

    accumulation increases
    Employment increases, and total wage
    payment increases
    Profits decrease, investment falls, and growth
    levels fall.
    Ultimately, rate of growth becomes zero.
    This is the Stationary State.
    P.Panth

    Stationary state
    Features:
    g

    1. No increase in
    Investment
    2. No increase in
    output zero growth

    3. No increase in wage
    rate,

    9-Jan-15

    4. No increase in
    standard of living
    P.Panth

    10

    Criticism

    Adam Smith was a pioneer in Economics,


    Crude theory of growth, profits and
    investment,
    Neglects the growth of agriculture,
    Based on Iron Law of wages,
    Stationary state ignores the role of
    technical progress.

    9-Jan-15

    P.Panth

    11

    You might also like