Economic Growth

A look around the world today reveals huge differences in standards of living resulting from the disturbing fact that, although some countries have enjoyed decades or even centuries of steadily rising per capita (per person) income levels, other countries have experienced hardly any economic growth at all.

2 Ways to Measure Growth  One way is to look at the increase in real GDP from one period to another measured as a percentage change, either quarterly of yearly. The GDP estimates are revised twice before coming up with the final estimate.

Here are some recent GDP growth rates from cnnmoney.com.

Table 25.1 in the text gives an overview of economic growth in the U.S. since Real GDP has grown at about 3.2% per year between 1950 and Real GDP per capita has increased 2% per year over that same period.

 The second way of measuring growth is to look at changes in real GDP per capita, or per person, from one period to another. Growth rates are usually positive but not always. Real GDP per capita = Real GDP ∕ population

Growth is a widely held economic goal. The expansion of total output relative to population results in rising real wages and incomes and thus higher standards of living. An economy that is experiencing economic growth is better able to meet people’s wants and resolve socio-economic problems. In short- growth lessens the burden of scarcity.

Here is a list of the top 15 countries according to their per capita GDP. 1 Qatar $ 102,800 2 Liechtenstein $ 89,400 3 Bermuda $ 86,000 4 Macau $ 82,400 5 Luxembourg $ 80,700 6 Monaco $ 70,700 7 Singapore $ 60,900 8 Jersey $ 57,000 9 Falkland Islands (Islas Malvinas) $ 55, Norway $ 55, Switzerland $ 54, Isle of Man $ 53, Hong Kong $ 50, Brunei $ 50, United States $ 49,800

Economists pay a lot of attention to growth rates because over a long period of time, they can really add up. The mathematical approximation called the rule of 70 provides insight into the effects of economic growth.

The rule tells us we can find the number of years it will take for some measure to double, given the annual percentage increase. # years to double = 70 ÷ annual percentage growth rate

If China’s economy is growing at 8 to 10% a year and the U.S. economy is growing at 2% a year, how long will it take China to overtake the U.S. as the world’s largest economy?

Determinants of Growth We now focus our discussion on 6 factors that directly affect economic growth rates.

Supply factors- 4 of the determinants relate to the physical ability of the economy to expand or it’s productive capacity.  Increases in the quantity and quality of natural resources.  Increases in the quantity and quality of human resources.  Increases in the supply/stock of capital goods.  Improvements in technology.

Demand Factor- to achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy’s expanding output of goods and services.

Efficiency factor- to reach its full production potential, an economy must achieve economic efficiency as well as full employment. In other words, the economy must use its resources in the least costly way and to produce the output most valued by society.

Although demand and efficiency factors are important, discussions of economic growth focus primarily on the supply factors. Productivity underlies all the supply factors and ultimately determines the level of growth and our standard of living.

Production Possibilities Analysis Remember that a PPF indicates the various possible combinations of products an economy can produce with its fixed resources and constant technology. An improvement in any of the supply factors will push the PPF outward as from AB to CD.

The demand factor reminds us that an increase in total spending is needed to move the economy from a point like (a) on curve AB to any of the points on the higher curve CD.

Normally, increases in total spending match increases in production capacity, and the economy moves from a point on the previous curve to a point on the expanded curve. Occasionally, the economy may end up at some point like (c) which represents a recession such as the one from

Capital goods Consumer goods A B C D a b c 0

Accounting for Growth: The following 5 factors appear to explain changes in productivity growth rates.

1.Technological advance- the largest contributor to productivity growth is technological advance, which is thought to account for about 40% of productivity growth. This includes not only innovative production techniques but new managerial methods and new forms of business organization that improve the process of production.

2. Quantity of capital- helps explain roughly 30% of productivity growth. More and better plant and equipment make workers more productive. Although some capital substitutes for labor, most capital is complementary to labor. In 2008 the quantity of capital available per worker was about $118,200 per worker. Public investment in U.S. infrastructure has grown and helped complement private capital development.

3. Education and Training- represents what’s called human capital- the knowledge and skills that make a worker productive. An estimated 15% of productivity growth derives from investments in people’s education and training.

4. Economies of Scale- Reductions in per-unit production costs that result from increases In output levels are called economies of scale. Markets have increased in size over time, allowing firms to increase output levels and thereby achieve production advantages associated with greater size.

5.Improved resource allocation- means that workers over time have moved from low-productivity employment to high-productivity employment. An example would be moving from agriculture to manufacturing.