ECONOMIC

GROWTH

17C H A P T E R

• Increases in the Quantity &

Quality of Natural Resources, • Human Resources• Capital Goods• Improvements in Technology

GROWTH ECONOMICS

What Policies HelpEconomic Growth?

• Increased Savings

• Education

• Comparative Advantage

PRODUCTION POSSIBILITIES ANALYSIS

Economic Growth

A

B

C

D

a

b

Cap

ital

Go

od

s

Consumer Goods0

PRODUCTION POSSIBILITIES ANALYSIS

Labor and Productivity

Real GDP =Hours

of WorkX

LaborProductivity

•Size of employed labor force

•Average hours of work

•Technological advance

•Quantity of capital•Education and training

REALGDP

SUPPLY DETERMINANTSOF REAL OUTPUT

LaborInputs(Hours

of Work)

LaborProductivity

(AverageOutput

Per Hour)

X =

GROWTH IN THE AD-AS MODEL

A

B

C

D

Ca

pit

al G

oo

ds

Consumer Goods

Pri

ce

Lev

el

Real GDP

ASLR1 ASLR2

Q1 Q2

ECONOMIC GROWTH IN THEEXTENDED AD – AS MODEL

Pri

ce L

evel

Real GDP

o

P1

AS2

ASLR1

AD2

Q1

ASLR2

Q2

AD1

AS1

P2

U.S. Economic Growth,Annual Averages for Five Decades

1950-1959 1960-1969 1970-1979 1980-1989 1990-1999

U.S. ECONOMIC GROWTH RATES

5

4

3

2

1

0

Real GDP Real GDP Per Capita

Av

era

ge

An

nu

al I

nc

reas

e (

Pe

rce

nt)

ACCOUNTING FOR GROWTH

Increase in Real GDP

Increase in quantity of labor

Increase in labor productivity

Accounting for Growth of U.S. Output, 1960-2008

1960 Q2to 1973 Q4

1973 Q4to 1990 Q3

1990 Q3to 2002 Q3

2002 Q3to 2008 Q4*

4.2

1.6

2.6

2.9

1.6

1.3

2.9

0.9

2.0

3.2

1.4

1.8

*Rates beyond 2002 are projections

Source: Economic Report of the President, 2003

Changes in the Educational Attainment of the U.S. Adult Population

1950 1960 1970 1980 1990 2000

100

80

60

40

20

0

College Graduates or More High School Graduates or More

ACCOUNTING FOR GROWTH

Source: U.S. Census Bureau

Pe

rce

nt

of

U.S

. Po

pu

lati

on

GLOBAL PERSPECTIVEAverage Test Scores, 8th. Grade, 1999

Source: Third International Math and Science Study

MathematicsRank Score

ScienceRank Score

12345678910 19

604587585582579558540534532531502

SingaporeSouth KoreaTaiwanHong Kong(China)

JapanBelgiumNetherlandsSlovak RepublicHungary Canada United States

123456789

1018

569568552550549545540539538535515

TaiwanSingaporeHungaryJapanSouth KoreaNetherlandsAustraliaCzech RepublicUnited KingdomFinlandUnited States

IS GROWTH DESIRABLEAND SUSTAINABLE?

The Antigrowth View

In Defense of

Economic Growth

economic growth

supply factors

demand factor

efficiency factor

labor productivity

labor-force participation rate

growth accounting infrastructurehuman capitaleconomies of scaleNew Economyinformation technologystart-up firmsincreasing returnsnetwork effectslearning by doing

ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005

Deficits,Surpluses

and thePublic Debt

Chapter 18 Next...

The End