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Growth Policy and Economic Productivity

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  • 0:05 Promoting Economic Growth
  • 1:00 Encouraging Saving and…
  • 2:34 Investing in Human Capital
  • 3:28 Investing in Technology
  • 4:05 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

What do savings accounts and promoting education have to do with helping the economy to grow? In this lesson, we will explore government policies that help promote higher long-run economic growth.

Promoting Economic Growth

One of the goals of the government is to promote the long-run growth of the economy. To do this, they can adopt various policies. Economists would say it this way: 'The government can promote growth by using fiscal policy to keep the economy near potential output.' Let's take a look at what these policies are and see how they can help the economy grow.

When the government attempts to increase economic growth during a recession, they may decide, among other things, to lower taxes or increase government spending. Fiscal policy is the use of government spending and taxation to influence the level of aggregate demand and, therefore, economic activity. One of the most important things governments can do to help the economy grow in the long run is encourage saving and investment.

Encouraging Saving and Investment

In the town of Ceelo, when Bob the lawn guy wants to invest in his business, he visits with the loan officer at his local bank and borrows money to purchase a new mower. What he may not realize is that the money he borrows comes from savings accounts that people have deposited at the bank. The bank receives money from savings accounts and loans most of it out to entrepreneurs like Bob. When he buys a new mower, that's considered investment in the economy, so saving is connected to investment, and investment causes the economy to grow.

Let's say the government decides to lower the tax rate that people pay on their savings accounts. Now Margie, who has a savings account at the bank, decides to spend less and save more. When she and many others like her save more, there is more money available to loan out to entrepreneurs for investment. Now suppose the government offers an investment tax credit to business owners like Bob if they invest in new equipment for their businesses. Because of this fiscal policy, more businesspeople across the economy decide to borrow and invest, and the economy grows.

But that's not all they can do. When the government wants to increase productivity, which will increase standards of living, they can adopt policies that lead to investments in human capital and improvements in technology.

Investing in Human Capital

Let's start with human capital. Suppose the government offers a new tax credit for parents with children going to college. This makes it cheaper to go to college and creates an incentive for more people to attend college. Higher education leads to more productive workers in the economy, and this leads to higher economic growth and higher standards of living. Economists call this investing in human capital. Human capital is the combination of education, knowledge, skills and health of workers who perform labor in the economy. Governments can help increase labor productivity and economic growth by encouraging investment in human capital. Investing in education is the most common example of this.

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