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

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

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

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

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

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

Real GDP Per Capita Real GDP Real GDP Average annual per capita, per capita, growth rate, Country 1960 2004 1960-2004 United States $12,892 $36,098 2.3% United Kingdom 10,323 26,762 2.2 France 8,531 26,168 2.5 Ireland 5,294 28,957 3.9 Japan 4,509 24,661 3.9 Singapore 4,219 29,404 4.4 Hong Kong 3,322 29,642 5.0 South Korea 1,458 18,424 5.8 Figures are in 1996 dollars Source: Penn World Table

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

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

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

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

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)

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

Accounting for Growth Accounting for Growth of U.S. Real GDP, 1953-2013 (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

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%)

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

Productivity Growth Accelerated rate of growth 1.4% per year 1973-1995 2.9% per year 1995-2005 Affects real output, real income, and real wages Pay higher wages without lowering profit

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

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

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

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

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