1 Sect. 7 - Economic Growth & Productivity Module 37 - Long Run Economic Growth What you will learn: How we measure long-run economic growth How real GDP has changed over time How real GDP varies across countries The sources of long-run economic growth How productivity is driven by physical capital, human capital, and technological progress

2 Sect. 7 - Economic Growth & Productivity Module 37 - Long Run Economic Growth Real GDP Per Capita - Real GDP divided by the nation’s population - used to compare economies of different nations or a nations economic growth over time

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5 Sect. 7 - Economic Growth & Productivity Module 37 - Long Run Economic Growth Real GDP Per Capita - Real GDP divided by the nation’s population - used to compare economies of different nations or a nations economic growth over time Rule of 70 - Formula to determine time for real GDP per capita to double Years to double = 70 Annual growth rate Ex: With 2% avg. annual growth rate it would take 35 yrs. for real GDP per capita to double

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7 Sect. 7 - Economic Growth & Productivity Module 37 - Long Run Economic Growth Real GDP Per Capita - Real GDP divided by the nation’s population - used to compare economies of different nations or a nations economic growth over time Rule of 70 - Formula to determine time for real GDP per capita to double Years to double = 70 Annual growth rate Ex: With 2% avg. annual growth rate it would take 35 yrs. for real GDP per capita to double

8 Labor Productivity - Output per worker - increasing productivity is the most important factor for economic growth Growth in Productivity - Physical Capital - Tools, equipment, machinery, etc. that workers use - U.S. workers use far more physical capital than most other countries or U.S. workers of the past

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10 Labor Productivity - Output per worker - increasing productivity is the most important factor for economic growth Growth in Productivity - Physical Capital - Tools, equipment, machinery, etc. that workers use - U.S. workers use far more physical capital than most other countries Human Capital - The knowledge and experience of the worker - improves labor productivity

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12 Technology - Most important factor in productivity growth - worker can produce more even with same amount of capital

13 Module 38 - Productivity & Growth What you will learn: How changes in productivity are illustrated using an aggregate production function How growth has varied among several important regions of the world and why the convergence hypothesis applies to economically advanced countries

14 Module 38 - Productivity & Growth Aggregate Production Function - Function showing how productivity per worker depends on the amount of capital (physical & human) per worker and the state of technology GDP per worker = T (technology) X (phys. cap. per worker) 0.4 X (hum. Cap. per worker) 0.6 Diminishing Returns to Physical Capital - With no change in technology or human capital, each increase in physical capital per worker leads to a smaller increase in productivity

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16 Module 38 - Productivity & Growth Aggregate Production Function - Function showing how productivity per worker depends on the amount of capital (physical & human) per worker and the state of technology GDP per worker = T (technology) X (phys. cap. per worker) 0.4 X (hum. Cap. per worker) 0.6 Diminishing Returns to Physical Capital - With no change in technology or human capital, each increase in physical capital per worker leads to a smaller increase in productivity

17 Growth Accounting - Estimate the contribution of each growth factor in the “aggregate production function” Total Factor Productivity - Amount of output that can be achieved with a given amount of factor inputs - with no increase in capital, technological advances would then be necessary for economic growth

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19 Growth Accounting - Estimate the contribution of each growth factor in the “aggregate production function” Total Factor Productivity - Amount of output that can be achieved with a given amount of factor inputs - with no increase in capital, technological advances would then be necessary for economic growth Natural Resources - Natural resources are also an important factor in determining economic growth - countries with abundant natural resources generally have a higher GDP per capita

20 Convergence Hypothesis - The idea that international differences in real GDP per capita narrow over time - nations that start with lower GDP per capita tend to have higher growth rates

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22 Convergence Hypothesis - The idea that international differences in real GDP per capita narrow over time - nations that start with lower GDP per capita tend to have higher growth rates

23 Module 39 - Why Economic Growth Rates Differ What you will learn: The factors that explain why long-run growth rates differ so much among countries The challenges of growth posed by scarcity of natural resources, environmental degradation, and efforts to make growth sustainable

24 Module 39 - Why Economic Growth Rates Differ Capital, Technology & Growth Differences - Economies experiencing rapid growth tend to be those that increase physical, human capital, and technological progress Government & Physical Capital - Governments that invest in infrastructure provide the foundation for economic growth

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26 Module 39 - Why Economic Growth Rates Differ Capital, Technology & Growth Differences - Economies experiencing rapid growth tend to be those that increase physical, human capital, and technological progress Government & Physical Capital - Governments that invest in infrastructure provide the foundation for economic growth Government & Human Capital - Government spending on education and provide funding for college through grants and loans

27 Government & Technology- Government invests in research and development Political Stability, Property Rights - For long-run economic growth a country must have political stability and protect the property rights of its’ citizens - people will not invest in business if they fear a collapse of the govt. or losing the rights to there investment Economic Growth & The Environment - Economic growth tends to increase human impact on the environment - must be a balance between un-regulated growth and concern for the environment

29 Government & Technology- Government invests in research and development Political Stability, Property Rights - For long-run economic growth a country must have political stability and protect the property rights of its’ citizens - people will not invest in business if they fear a collapse of the govt. or losing the rights to there investment Economic Growth & The Environment - Economic growth tends to increase human impact on the environment - must be a balance between un-regulated growth and concern for the environment

30 Module 40 - Economic Growth in Macroeconomics Models What you will learn: How long-run economic growth is represented in macroeconomic models How to model the effects of economic growth policies

31 Module 40 - Economic Growth in Macroeconomics Models Long-run Econ. Growth & Prod. Possibilities Curve - A sustained rise in the quantity of goods and services an economy produces

33 Module 40 - Economic Growth in Macroeconomics Models Long-run Econ. Growth & Prod. Possibilities Curve - A sustained rise in the quantity of goods and services an economy produces Depreciation - A loss in the value of physical capital due to wear, age, or obsolescence - inward shift in PPC of consumer goods Long-run Econ. Growth & Agg. Demand - Agg. Supply Model - In the long-run, change in aggregate price level has no effect on the Long-run aggregate supply - at the point of potential output

35 Module 40 - Economic Growth in Macroeconomics Models Long-run Econ. Growth & Prod. Possibilities Curve - A sustained rise in the quantity of goods and services an economy produces Depreciation - A loss in the value of physical capital due to wear, age, or obsolescence - inward shift in PPC of consumer goods Long-run Econ. Growth & Agg. Demand - Agg. Supply Model - In the long-run, change in aggregate price level has no effect on the Long-run aggregate supply - at the point of potential output - Growth in potential output shifts LRAS curve to the right

37 Module 40 - Economic Growth in Macroeconomics Models Long-run Econ. Growth & Prod. Possibilities Curve - A sustained rise in the quantity of goods and services an economy produces Depreciation - A loss in the value of physical capital due to wear, age, or obsolescence - inward shift in PPC of consumer goods Long-run Econ. Growth & Agg. Demand - Agg. Supply Model - In the long-run, change in aggregate price level has no effect on the Long-run aggregate supply - at the point of potential output - Growth in potential output shifts LRAS curve to the right

38 Long-run Growth and Short-run Fluctuations - Important to distinguish between short-run fluctuations due to the business cycle and actual long-run economic growth

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40 Long-run Growth and Short-run Fluctuations - Important to distinguish between short-run fluctuations due to the business cycle and actual long-run economic growth

41 The End