Chapter 26

Economic Growth

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• Economists define and measure economic growth two different ways. • an increase in real GDP over some time period (% growth)• as an increase in real GDP per capita over some time period

(% growth)

• During recession, growth % negative instead of positive.• GDP per capita allows u to compare countries of different

sizes (standard of living) • For country-to-country comparisons, real GDP is more useful. • GDP growth economic goal.

LO

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Economic Growth• Increase in real GDP or real GDP per capita over some

time period• Percentage rate of growth• Growth as a goal• Arithmetic of growth: Rule of 70

Approximatenumber of yearsrequired to doublereal GDP

=70

annual percentage rateof growth

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Economic Growth• Growth in U.S. real GDP 1950-2012• Increased more than sixfold • 3.1% per year

• Growth in U.S. real GDP per capita• Increased more than 3 fold• At roughly 2% per year

• Qualifications • Improved products and services• Added leisure• Other impacts

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Economic GrowthReal GDP and Real GDP per Capita

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Modern Economic Growth

• Began with the Industrial Revolution in late 1700s

• Ongoing increases in living standards• Time for leisure• Social change• Democracy• Human lifespan doubled

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Modern Economic Growth• Began in Britain• Has spread slowly• Starting date main cause of worldwide

differences in living standards• Catching up is possible• Leader countries invent technology• Follower countries adopt technology• Can grow faster

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Modern Economic Growth

Real GDP Real GDP Average annual per capita, per capita, growth rate,

Country 1960 2010 1960-2010

United States $ 14,766 $41,365 2.1%United Kingdom 11,257 34,268 2.2France 9,347 31,299 2.4Ireland 6,666 34,877 3.3Japan 5,472 31,477 3.5Singapore 4,149 55,862 5.2Hong Kong 3,849 38,865 4.6South Korea 1,765 26,609 5.4

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Note: GDP figures for all countries are measured in “international dollars” of equal value to U.S. dollars in 2005.Source: Penn World Table version 7.1, pwt.econ.upenn.edu. Used by permission of the Center for International Comparisons at the University of Pennsylvania

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Modern Economic Growth

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Institutional Structures of Growth

There are several institutional structures that promote and sustain modern economic growth

•Strong property rights (ppl wont involve in dubious co & bad government)

•Patents and copyrights (important if society wants a constant flow of innovative tech & ideas)

•Efficient financial institutions (literacy, competitive market system)

•Literacy and widespread education (STEM, soft skill)

•Free trade•Competitive market system

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Determinants of Growth

• Supply factors

• quantity and quality of natural resources • quality and quantity of human resources• supply (or stock) of capital goods• improvements in technology

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INCREASE

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Determinants of Growth

• Demand factor• Households, businesses, and government

must purchase the economy’s expanding output

• Efficiency factor• Must achieve economic efficiency and full

employment

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a

EconomicGrowth

b

D

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B

A

C

Consumer Goods

Capi

tal G

oods

c

From Chapter 1:

Production Possibilities

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Labor and Productivity

•Size of employed labor force

•Average hours of work

LaborInputs(hours ofwork)

•Technological advance

•Quantity of capital

•Education and training

•Allocative efficiency

•Other

LaborProductivity(average output per hour)

RealGDP

Real GDP = hours of work x labor productivity

x =

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U.S. Economic Growth

Item1953 Q2

To 1973 Q41973 Q4

To 1995 Q41995 Q4

To 2001 Q12001 Q1

To 2011 Q1

Projected2011 Q1

To 2021 Q4

Increase in real GDP 3.6 2.8 3.8 1.7 2.5

Increase in quantity of labor 1.1 1.3 1.4 -0.7 0.2

Increase in labor productivity 2.5 1.5 2.4 2.4 2.3

Accounting for the Growth of U.S. Real GDP, 1953-2011, Plus Projection from 2011-2022

(Average Annual Percentage Changes)

Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2010, p. 76 Economic Report of the President 2011, p. 52; Bureau of Economic Analysis; Bureau of Labor Statistics.

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Accounting for Growth

• Factors affecting productivity growth• Technological advance (40%)• Quantity of capital (30%)• Education and training (15%)• Economies of scale and resource allocation

(15%)

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Accounting for GrowthAverage Test Scores of Eighth GradeStudents in Math and Science, 2011

Mathematics Science

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Productivity Growth

• Average rate of growth• 1.5% per year 1973-1995• 2.4% per year 1995-2012

• Affects real output, real income, and real wages

• Pay higher wages without lowering profit

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Productivity Growth(what are the reasons for the increase productivity

growth?)• Microchip/information technology• Start-up firms and increasing returns• Sources of increasing returns• More specialized inputs• Spreading of development costs• Simultaneous consumption• Network effects• Learning by doing

• Global competition

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Productivity Growth

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Economic Growth

• Is economic growth desirable and sustainable?• The antigrowth view• Environmental and resource issues

• In defense of economic growth• Higher standard of living• Human imagination can solve

environmental and resource issues

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Economic Growth

• Growth is the path to greater material abundance

• Results in higher standards of living• Increases leisure time• Allows for the expansion and application of

human knowledge

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Global Perspective

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Can Economic Growth Survive Population Decline?

• As nations industrialize, their economies shift from agriculture to industry• Fertility rates fall• Decrease in population• Each generation smaller than the one before

• Inverse dependency ratio• Social security issues• Innovation and productivity