Economic Growth Unit Chapter 6 25 Business, Computers, & Information Technology 6 25

Promote Economic Growth Goal #1 Promote Economic Growth Growth lessens the burden of scarcity. How does an economy experience growth?

Real GDP per capita = Real GDP Population

Graphing Growth 1. Business Cycle 2. Production Possibilities Curve 3. AS/AD Level of real output Time Peak Recession Expansion Trough Trend Growth Robots Pizzas Price Level AD GDPR Qf PLe LRAS AS LRAS1 AS1 PL1 AD1 Q1

Structures that Promote Growth Property Rights – Individuals will invest when they believe they will profit from their investment, and that their property will not be stolen. Patents and Copyrights give a financial incentive to invest. Efficient Financial Institutions channel savings from HHs to businesses, entrepreneurs, and inventors. Education for inventors and work-force to develop and implement new technologies. Free Trade enables countries to specialize in goods and services with a comparative advantage. New ideas spread. Competition in a market system – Prices and profits signal what and how much to produce.

Determinants of growth

Determinants of Growth SUPPLY FACTORS – Physical and technological factors. a. Increase in quantity & quality of Natural Resources. Comes from “mother nature.” Ex: Marcellus Shale natural gas discovery estimated to create 1 million new jobs by 2025, lower manufacturing production costs, and spur economic growth.

Determinants of Growth SUPPLY FACTORS – cont’d. b. Increase in quantity & quality of Human Resources. Accounts for 15% of productive growth. Ex: College degrees, vocational training, OJT, Internships, etc.

Determinants of Growth SUPPLY FACTORS – cont’d. c. Increase in quantity of Capital Goods. Any human-made resource used to create other goods and services. Accounts for 30% of productive growth. Ex: Tools, tractors, machinery, buildings, factories, etc. Publically owned capital is called Infrastructure. Ex: Highways and bridges, water systems, airports, waste treatment facilities, educational facilities, transit systems, etc.

Determinants of Growth SUPPLY FACTORS – cont’d. Improvement in Technology. New and better goods and services or new and better ways of producing or distributing them. Business invest in Research & Development and have incentives to innovate. Accounts for 40% of productive growth. Ex: computers, cell phones, GPS, conveyor belts, etc. Price Level AD GDPR Qf PLe LRAS AS AS1 PL1 Q1

Determinants of Growth 2. DEMAND FACTOR – HHs, businesses and government must purchase economy’s expanding output of goods and services. The economy cannot achieve higher production potential without increasing spending! 3. EFFICIENCY FACTOR – An economy must achieve full productive and allocative efficiency, and full employment to reach full production potential. Price Level AD GDPR Qf PLe LRAS AS LRAS1 AS1 All 3 factors must be present to achieve economic growth. PL1 AD1 Q2

labor and factor productivity

Labor and Productivity Real GDP = Hours of work x labor productivity An increase in either will lead to economic growth. Example: In Year 1 Ashna has 10 workers, each working 2,000 hours per year. Labor Input = Labor Productivity = $10. What is Real GDP? 20,000 hours $200,000 In Year 2 Ashna has 12 workers. Labor input = Labor Productivity = $10.40. What is Real GDP? What was Ashna’s rate of Economic Growth? 249,600-200,000 x 100 = 200,000 24,000 hours $249,600 24.8%

Labor and Productivity Source: Organization for Economic Co‑operation and Development

Effects of growth

Effects of Growth = = = 1. Time to Double Rule of 70 calculates number of years it will take for some measure of growth to double. Ex: At a 3% rate of growth, how long will it take the U.S. GDP to double? Approximate # Years to Double = 70 Annual % rate of growth Approximate # Years to Double 70 3% = = 23 years

Effects of Growth 2. Higher Living Standards Improved products and services, more education, better healthcare, added leisure (avg work week = 35 hours), improved infrastructure, more police and fire protection, improved work conditions, reduced poverty. 3. Negative externalities (Antigrowth View) Environmental waste threatens ecological systems. Stressful work conditions due to work pace and rapidly changing technologies cause physical and mental health problems. Growth does not solve poverty; redistribution of income and wealth.

TED Video 32

That’s It