1. Chapter 25 Economic Growth McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives
Modern economic growth and increasing living standards
Growth accounting
U.S. productivity growth
Is growth desirable and sustainable?

3. annual percentage rate
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
Approximate
number of years
required to double
real GDP 70 =
annual percentage rate
of growth

4. Economic Growth Growth U.S. real GDP 1950-2005
Increased 6 fold
3.5% per year
Growth in U.S. real GDP per capita
Increased more than 3 fold
2.3% per year
Qualifications
Improved products and services
Added leisure
Other impacts

5. Modern Economic Growth
Began with the Industrial Revolution in late 1700’s
Ongoing increases in living standards
Time for leisure
Social change
Democracy
Human lifespan doubled

6. 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

7. Real GDP Per Capita Real GDP Real GDP Average annual
per capita, per capita, growth rate,
Country
United States $12,892 $36, %
United Kingdom 10, ,
France 8, , Ireland , ,
Japan , ,
Singapore , ,
Hong Kong , ,
South Korea , ,
Figures are in 1996 dollars
Source: Penn World Table

8. Modern Economic Growth
Growth-promoting institutional structures
Strong property rights
Patents and copyrights
Efficient financial institutions
Literacy and widespread education
Free trade
Competitive market system

9. Ingredients of Growth Supply factors
Increases in quantity and quality of natural resources
Increases in quality and quantity of human resources
Increases in the supply (or stock) of capital goods
Improvements in technology

10. Ingredients of Growth Demand factor Efficiency factor
Households, businesses, and government must purchase the economy’s expanding output
Efficiency factor
Must achieve economic efficiency and full employment

11. Production Possibilities
From Chapter 1: C A
Economic
Growth
Capital Goods c b a B D
Consumer Goods

12. Labor and Productivity
Real GDP = hours of work x labor productivity
Size of employed labor force
Labor
Inputs
(hours of
work)
Average hours of work x
Real
GDP =
Technological advance
Quantity of capital
Education and training
Allocative efficiency
Other
Labor
Productivity
(average output per hour)

13. U.S. Economic Growth Annual Averages for Five Decades Real GDP
Year
Average Annual Increase (Percent)
Real GDP
Real GDP Per Capita
Source: Bureau of Economic Analysis

14. Accounting for Growth Accounting for Growth of U.S. Real GDP,
(average annual percentage changes)
Item
1953 Q2 to
1973 Q4
1995 Q2
2001 Q1
2007 Q3
2013 Q4*
Increases in Real GDP
Increases in
Quantity of Labor
Labor Productivity
3.6
1.1
2.5
2.8
1.3
1.5
3.8
1.4
2.4
2.6
-0.1
2.7
0.3
Source: Economic Report of the President, 2008
*Beyond 2007 are Projections

15. 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%)

16. Accounting for Growth
Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003
Mathematics
Science
Singapore
South Korea
Hong Kong
Taiwan
Japan
Belgium
Netherlands
Estonia
Hungary
Malaysia
United States 1 2 3 4 5 6 7 8 9 10 15
605
589
586
585
570
537
536
531
529
508
504
Singapore
Taiwan
South Korea
Hong Kong
Estonia
Japan
Hungary
Netherlands
United States
Australia 1 2 3 4 5 6 7 8 9 10
578
571
558
556
552
543
536
527

17. Productivity Growth Accelerated rate of growth
1.4% per year
2.9% per year
Affects real output, real income, and real wages
Pay higher wages without lowering profit

18. Accelerated Productivity Growth
Microchip/information technology
New firms and increasing returns
Sources of increasing returns
More specialized inputs
Spreading of development costs
Simultaneous consumption
Network effects
Learning by doing
Global competition

19. Economic Growth Is accelerated productivity growth sustainable?
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

20. Economic Growth in China
Growth averages past 25 years:
9% annual growth output
8% annual growth output per capita
Labor more productive
More international trade
Transition to market economy
Joined WTO 2001
Financial system remains weak
Income inequality across geographic areas

21. Key Terms economic growth real GDP per capita rule of 70
modern economic growth
leader countries
follower countries
supply factors
demand factor
efficiency factor
labor productivity
labor-force participation rate
growth accounting
infrastructure
human capital
economies of scale
information technology
start-up firms
increasing returns
network effects
learning by doing

22. Next Chapter Preview…
Business Cycles,
Unemployment,
and Inflation