Economic Growth Parts I & II

AP Macroeconomics

Where did we come from?

In a previous lesson, we looked at the relationship between inflation and unemployment, and introduced something called the Phillips Curve.

http://sfbayhomes.com/inflation-is-real-estate-the-answer/

Where are we going? Today we will discuss the

main sources of long-term economic or real GDP growth and the policies that governments might use to increase economic growth.

There is a difference in the short-term fluctuations in real GDP that result from the business cycle and the long-run growth in real GDP.

http://unentogs.blogspot.com/2012/01/economic-growth.html

The trend…

Let’s talk about the long-term growth trend in the United States.

The average growth rate in per capita real GDP has been above 2% per year for the last 40 years.

At the same time, the annual rate of growth has fluctuated dramatically.

http://www.die.net/musings/national_debt/

How does growth occur?

Certain economic agents must have the appropriate incentives. These “agents” are:

Producers Consumers

http://www.infiniteunknown.net/tag/consumers/

Growth accounting…

Focuses on three sources of long-run economic growth:

1) The supply of labor 2) The supply of capital 3) The supply of technology

Increases in any of these leads to increases in real GDP!

Growth in Labor Supply…

This is mostly the growth in the population rate…

When the population swells, so too does the labor supply.

http://eplegal.com.vn/home/en/press-room/publication/124-the-new-draft-labour-code-from-an-employers-perspective.html

What about capital & technology?

Increases in capital or in technology, as we already know, lead to increases in labor productivity.

Increases in labor productivity lead to increases in real GDP (especially in the long-run).

http://www.ventures-africa.com/2012/04/diary-of-an-under-30-ceo-when-capital-is-not-enough/, http://ecologyofeducation.net/wsite/?cat=21

Think…

How does labor productivity lead to long term economic growth? (or vice versa)

Economic Growth Part II

What now?

We can refer to the variables of labor supply, capital, and technology as the levers of growth.

That’s great to know, but what about them? We are interested in how these so called levers of growth can be stimulated.

Let’s talk about that now.

Stimulating the Levers of Growth

There are 4 ways in which this can be accomplished…

SAVINGS

There are 4 ways in which this can be accomplished:

1) Increasing savings increases the supply of loanable funds, decreases the interest rate, and spurs investment. In the United States, tax incentives is the primary

method for increasing savings (for example, through IRAs)

RESEARCH

There are 4 ways in which this can be accomplished:

2) Increasing government support for basic research. This stimulates research and development.

A good example? One tool is National Science Foundation grants.

http://www.oswego.edu/academics/colleges_and_departments/arts_and_sciences/stem.html

INTERNATIONAL TRADE

There are 4 ways in which this can be accomplished:

3) Reaping as many benefits as possible from comparative advantage by advocating international trade. This stimulates growth on a global scale.

http://www.seraph.net/tag/international-trade/

EDUCATION

There are 4 ways in which this can be accomplished:

4) Through improvement of the condition, quality, and capacity of the labor force (i.e. education, training, etc.), workers become more productive with any given level of capital and technology.

Education is a vital tool. Providing incentives for the improvement of education (such as education IRAs) encourages more people to obtain an education, which also stimulates growth.

http://www.moneynews.com/surveys/RaisingTaxes/Will-Raising-Taxes-Help-or-Hurt-America-/id/61/kw/default?PROMO_CODE=10FCE-1&gclid=CLPIovPKkLQCFQU5nAodNhUA7g

RECAP?

The government can stimulate economic growth by encouraging, increasing, improving, and providing incentives for four things…

1) Savings 2) Research 3) International Trade 4) Education/training

Connect the dots..

Remember the PPC from way back in Unit 1?

How do changes in the labor force relate to the PPC? Answer: Increases in the labor

force and advances in technology can be shown as an outward shift in the PPC or the LRAS. Both shifts demonstrate that total output has increased.

http://www.harpercollege.edu/mhealy/eco212i/lectures/econgrow/econgrow.htm

BOTH SHIFTS DEMONSTRATE

THAT TOTAL OUTPUT HAS INCREASED!

And now…

Some resources:

Reffonomics:

http://www.reffonomics.com/

Morton workbook: Activity 47

Works Cited

Economics of Seinfeld. http://yadayadayadaecon.com/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.