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

2. 25-2 Chapter Objectives Modern economic growth and increasing living standards Growth accounting U.S. productivity growth Is growth desirable and sustainable?

3. 25-3 Economic Growth Increase in real GDP or real GDP per capita over some time period –What are the advantages of each calculation? Percentage rate of growth Growth as a goal Calculate: GDP chart GDP Growth % = This year RGDP – Last year RGDP Last year RGDP

4. 25-4 Economic Growth Growth in 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 –What does the difference between the two tell us? What are the benefits of GDP growth? –Improved products and services –Added leisure –Other impacts: environment, stress, etc…

5. 25-5 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. 25-6 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. Modern Economic Growth Real GDP Real GDP Average annual per capita, per capita, growth rate, Country 1960 2010 1960-2010 United States $ 14,766 $41,365 2.1% United Kingdom 11,257 34,2682.2 France 9,347 31,2992.4 Ireland 6,666 34,8773.3 Japan 5,472 31,4773.5 Singapore 4,149 55,8625.2 Hong Kong 3,849 38,8654.6 South Korea 1,765 26,6095.4 LO2 Note: GDP figures for all countries are measured in “international dollars” of equal value to U.S. dollars in 2005. Source: Penn World Table version 7.1, pwt.econ.upenn.edu. Used by permission of the Center for International Comparisons at the University of Pennsylvania

8. Homework Read Ch. 26, pgs. 569-578 and complete Ch. 26 worksheet #1-3 25-8

9. 25-9 Modern Economic Growth What types of policies or structures can promote growth? –Strong property rights –Patents and copyrights Emergence of lawsuits –Efficient financial institutions –Literacy and widespread education –Free trade –Competitive market system

10. Tax Rates Compared 25-10

11. 25-11 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

12. 25-12 Ingredients of Growth Demand factor –Households, businesses, and government must purchase the economy’s expanding output Efficiency factor –Must achieve economic efficiency and full employment Productive and allocative efficiency

13. 25-13 Production Possibilities From Chapter 1: Consumer Goods Capital Goods a Economic Growth b A C BD c

14. Homework Review worksheet #1-3 25-14

15. Homework Read Ch. 26, pgs. 578-587 and complete Ch. 26 worksheet #4-5 and FRQs 25-15

16. 25-16 Labor and Productivity Size of employed labor force Average hours of work Labor Inputs (hours of work) Technological advance Quantity of capital Education and training Allocative efficiency Other Labor Productivity (average output per hour) Real GDP Real GDP = hours of work x labor productivity x =

17. 25-17 U.S. Economic Growth Annual Averages for Five Decades Year Average Annual Increase (Percent) Real GDP Real GDP Per Capita Source: Bureau of Economic Analysis

18. 25-18 Accounting for Growth Accounting for Growth of U.S. Real GDP, 1953-2011 (average annual percentage changes) Item 1953 Q2 To 1973 Q4 1973 Q4 To 1995 Q4 1995 Q4 To 2001 Q1 2001 Q1 To 2011 Q1 Projected 2011 Q1 To 2021 Q4 Increase in real GDP3.62.83.81.72.5 Increase in quantity of labor 1.11.31.4-0.70.2 Increase in labor productivity 2.51.52.4 2.3

19. 25-19 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

20. 25-20 Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003 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 Mathematics Science Accounting for Growth

21. 25-21 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

22. 25-22 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 G lobal competition

23. 25-23 Economic Growth Is accelerated productivity growth sustainable? Is economic growth desirable and sustainable? The antigrowth view –Environmental and resource issues – poverty? –Is it worth the cost? Resources, stress, greed In defense of economic growth –Higher standard of living –Human imagination can solve environmental and resource issues

24. 25-24 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