1. Economic Growth

2. The Nature of Growth
Economic growth refers to increases in the output (real GDP) – an expansion of production possibilities.

3. Two Types of Growth The short run — increased capacity utilization
The long run — expanded capacity

4. Short-Run Changes in Capacity Use
The easiest kind of growth comes from the increased use of our productive capacity.

5. Short-Run Changes in Capacity Use
We do not always take full advantage of our productive capacity.

6. Short-Run Changes in Capacity Use
Productive capacity is illustrated by the production possibilities curve.
Production possibilities are the alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.

7. Short-Run Growth: Increased Capacity Utilization
CONSUMPTION GOODS (quantity per year)
INVESTMENT GOODS (quantity per year) B A

8. Long-Run Changes in Capacity
To achieve large and lasting increases in output, the production possibilities must be pushed outward.

9. Long-Run Changes in Capacity
Economists tend to define economic growth in terms of changes in potential GDP.

10. Long-Run Growth: Expanded Capacity
CONSUMPTION GOODS (quantity per year)
INVESTMENT GOODS (quantity per year) A C B

11. Aggregate Supply Focus
Economic growth is possible only if the AS curve shifts right.

12. Supply-Side Focus DETERMINANTS OUTCOMES Jobs Internal market AS forces
Output
Jobs
Prices
International
balances
Internal market
forces
External shocks AD AS
Growth
Policy levers:
fiscal policy
monetary policy
supply-side policy

13. Nominal vs. Real GDP
Economic growth refers to increases in real GDP.

14. Nominal vs. Real GDP
Nominal GDP is the total value of goods and services produced within a nation’s borders, measured in current prices.

15. Nominal vs. Real GDP
Real GDP is the inflation-adjusted value of GDP; the value of output measured in constant prices.

16. The GDP Growth Rate
Growth rate is the percentage change in real GDP from one period to another.
Growth Rate =
change in real GDP
base period GDP

17. The GDP Growth Rate
Challenge for the future is to maintain higher rates of economic growth.

18. Recent U.S. Growth Rates GROWTH RATE (percent per year 1.0 -2.0 -3.0
-1.0
2.0
3.0
4.0
5.0
6.0
7.0
GROWTH RATE (percent per year
1960
1964
1968
1972
1976
1980
1984
1988
1992
2000
1996
2004

19. The Exponential Process
Even one year of “low” growth implies lost output.
Economic growth is a continuing process.
Gains made in one year accumulate in future years.

20. GDP per Capita: A Measure of Living Standards
GDP per capita — total GDP divided by total population.
It is average GDP.

21. GDP per Capita: A Measure of Living Standards
Growth in GDP per capita is attained only when growth of output exceeds population growth.

22. GDP per Capita: A Measure of Living Standards
U.S. GDP per capita has more than doubled since Ronald Reagan was president.

23. The History of World Growth
1000
1500
1820
1995
$6,000
5,000
4,000
3,000
2,000
1,000

24. The Rule of 72
Small differences in annual growth rates cumulate into large differences in GDP.
Seventy-two divided by the growth rate equals the number of years it takes to double.

25. The Rule of 72

26. GDP per Worker GDP per worker is a measure of productivity
Average workers today produce nearly twice as much as their parents.

27. GDP per Worker
The U.S. labor force grew faster than the population during the 1990s.
The labor force includes all persons over age sixteen who are either working for pay or actively seeking paid employment.

28. GDP per Worker The U.S. employment rate also increased.
The employment rate is the proportion of the population that is employed.

29. GDP per Worker
If productivity is increasing, then per capita GDP is likely to rise as well.
Productivity is measured as output per unit of input, such as a labor hour.

30. Average annual productivity increase 1990-99
Productivity Gains
Average annual productivity increase
5.3
4.1
4.2
2.6
2.7
2.5
2.0
1.8
Italy
Great
Britain
Japan
United
States
Canada
France
Germany
Sweden

31. Sources of Productivity Growth
Sources of productivity gains include:
Higher skills
More capital
Improved management
Technological advance

32. Labor Quality
As education and training levels rise, so does productivity.

33. Capital Investment
Capital investment is a prime determinant of productivity and growth.
Investment refers to expenditures on new plant and equipment in a given time period, plus changes in business inventories.

34. Average Annual Growth Rate of Labor, Capital, and Productivity

35. Management
Entrepreneurship and the quality of continuing management are major determinants of economic growth.

36. Management
There is a potential conflict between short-term profits and long-term productivity gains.

37. Management
Managers must develop personnel structures and incentives that make employees want to contribute to production.

38. Research and Development
Scientific research
Product development
Innovations in production technique
Development of management improvements

39. Policy Levers
Government policies can have a major impact on whether, and how far, the aggregate supply curve shifts.

40. Education and Training
Government spending on education and training has two payoffs:
It stimulates the economy in the short run.
It increases the long-run capacity to produce.

41. Immigration Policy
The quality and quantity of labor are affected by immigration policy.
Direct contributor to outward shift of production possibilities.
Recent immigrants have lower educational level than native-born Americans.

42. Investment Incentives
Tax policy is not only a staple of short-term stabilization policy but a determinant of long-run growth as well.

43. Savings Incentives
Supply-side economists favor tax incentives encouraging saving as well as greater tax incentives for investment.
Saving is that part of disposable income not spent on current consumption.

44. Government Finance
When government borrows to finance its spending, it dips into the nation’s saving pool.

45. Government Finance
Crowding out is a reduction in private-sector borrowing (and spending) caused by increased government borrowing.

46. Government Finance
Crowding in is a increase in private-sector borrowing (and spending) caused by decreased government borrowing.

47. Government Finance
Fiscal and monetary policies must be evaluated in terms of impact on long-run aggregate supply as well as short-run aggregate demand.

48. Deregulation Government regulations impacts aggregate supply by:
Limiting the flexibility of producers to respond to changes in demand.
Raising production costs.

49. Deregulation Factor Markets Minimum wage laws. OSHA standards.
More people would be hired without regulation.

50. Deregulation Product Markets Transportation costs
Food and drug standards
Regulation causes restricted supply

51. Deregulation
The basic contention of supply-side economists is that regulatory costs are too high.

52. Economic Freedom
Nations with the most economic freedom have the highest GDP per capita and grow the fastest.

53. 2001 Levels of Economic Freedom
2000 Per Capita Income in Purchasing Power Parties
$26,855
5,000
10,000
15,000
20,000
Repressed
Mostly unfree
Free
Mostly free
25,000
$12,569
$3,229
$3,585
Hong Kong
New Zealand
Luxembourg
United States
Canada
Japan
Peru
Mexico
Indonesia
Brazil
Egypt
Russia
Libya
Belarus
Cuba
North Korea

54. Is More Growth Desirable?
More growth can lead to:
Congestion
Air pollution
Depleted natural resources

55. Is More Growth Desirable?
The debate usually centers around the mix of goods and services being provided rather than the quantity of output.

56. Economic Growth
End of Chapter 14