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ECONOMIC
GROWTH
One tool can have many uses!
Please listen to the audio as you work through the slides

2. Economic Growth Learning Objectives:
Students will be able to thoroughly and completely explain:
The 4 key supply factors that impact economic growth.
The factors that limit growth.

4. Key Growth Factors
Increases in the Quantity & Quality of Natural Resources
Increases in the Quantity & Quality of Human Resources
Increases in the Supply (or Stock) of Capital Goods
Improvements in Technology
Households, Businesses, and Government Must Purchase the Economy’s Expanded Output
The Economy Must Achieve Economic Efficiency (productive and allocative) as well as Full employment

5. Key growth factors 4 Supply Factors that make growth possible
Increases in the Quantity & Quality of Natural Resources
Examples of natural resources?
Questions:
Where will we get the resources?
How will we get the resources?
Who will we compete with to get the resources?
Solve this problem using the tools of monetary and fiscal policy available

6. A Problem solving strategy
Create a solution that will deliver the desired result.
Find a way to make the solution work.
Select the best tool from monetary and fiscal policy that will bring your solution to life.

7. Problem You are in charge of economic policy
Your mission is to increase the rate of growth of U.S. GDP from 0% to 4% per year in 3 years.
You can use the tools of monetary policy and fiscal policy
You are to focus on increasing the quantity and/or quality of natural resources to achieve your goal. Please try to avoid adding to the global warming problem.
How would you solve this problem?

8. Key growth factors Supply Factors that make growth possible
Increases in the Quantity & Quality of Human Resources
Questions:
Where will we get the resources?
How will we get the resources?
Who do we compete with to get the resources?
What will we do with the resources that are of lower “quality”?

9. Key growth factors Supply Factors that make growth possible
Increases in the Supply (or Stock) of Capital Goods
Example of capital goods?
What capital goods will we increase the supply of?
Who will pay for those capital goods?
What is the rationing mechanism for determining what goods will be produced and which ones will not?

10. Key growth factors Supply Factors that make growth possible
Improvements in Technology
Examples of technological improvements?
Questions:
Which technologies should we improve or grow?
Who should pay for that?
Who should get them?

11. Key growth factors for growth to be realized
Demand Factor
Households, Businesses, and Government Must Purchase the Economy’s Expanded Output
No unplanned inventories
Resources fully employed
Remember the circular flow model?
Questions:
How should we increase demand?
How should we manage the increase in demand?
How long will we be able to increase demand?

12. Key growth factors for growth to be realized
Efficiency Factor
The Economy Must Achieve Economic Efficiency (productive and allocative) as well as Full employment
Questions:
How can we achieve / approach productive efficiency?
How can we achieve /approach allocative efficiency?
How can we achieve full employment?

13. Economic Growth Capital Goods b a Consumer Goods
Production Possibilities Analysis
Demand and efficiency factors make it real
Economic Growth C A b
Capital Goods a B D
Consumer Goods

14. Labor and Productivity
Production Possibilities Analysis
Increase inputs and increase productivity of those inputs to raise real output and income.
Labor and Productivity
Labor productivity – real output per hour of work.
Real GDP =
Hours
of Work X
Labor
Productivity
Total output = worker hours x labor productivity
Labor Productivity – measured by real output per worker hour.

15. 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)

16. Sources of productivity growth
Accounting for Growth
Sources of productivity growth
Technological Advance - largest contributor to increases in the productivity of American labor – 40%
Quantity of Capital – 30%
Education and Training - Human Capital – 15%
Nation's infrastructure - public capital goods such as highways and sanitation systems, levee systems, bridges, water systems

17. Changes in the Educational Attainment of the U.S. Adult Population

18. GLOBAL PERSPECTIVE Average Test Scores, 8th. Grade, 1999 Mathematics
Rank Score
Science
Rank Score 1 2 3 4 5 6 7 8 9 10 19
604
587
585
582
579
558
540
534
532
531
502
Singapore
South Korea
Taiwan
Hong Kong(China)
Japan
Belgium
Netherlands
Slovak Republic
Hungary
Canada
United States 1 2 3 4 5 6 7 8 9 10 18
569
568
552
550
549
545
540
539
538
535
515
Taiwan
Singapore
Hungary
Japan
South Korea
Netherlands
Australia
Czech Republic
United Kingdom
Finland
United States
Source: Third International Math and Science Study

19. Accounting for Growth
Average Test Scores of Eighth Grade Students in Math & 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

20. Accounting for Growth Accounting for Growth of U.S. Real GDP,
(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

21. Sources of productivity growth
Accounting for Growth
Sources of productivity growth
Economies of Scale - large producers may be able to use more efficient technologies than smaller producers
Improved Resource Allocation - The historical reallocation of labor from agriculture to manufacturing in the United States has increased the average productivity of labor %

22. Productivity Acceleration:
A New Economy?
Based on 1995 – 2002 growth
Reasons for the Productivity Acceleration
Microchip and Information Technology
Start-Up Firms
New Firms and Increasing Returns

23. Productivity Acceleration:
A New Economy?
Sources of Increasing Returns
More Specialized Inputs
Spreading of Development Costs
Simultaneous Consumption
Network Effects - Increases in the value of a product to each user, including existing users, as the total number of users rises
Learning by Doing
Global Competition

24. Productivity Acceleration:
A New Economy?
Macroeconomic Implications of stronger productivity growth and greater global competition.
More Rapid Economic Growth
Low Natural Rate of Unemployment
Growing Tax Revenues
Skepticism About the New Economy - too soon to judge whether the high productivity advances between 1995 and 2002 are permanent or transitory.

25. Productivity Acceleration:
A New Economy?
Proponents of the New Economy – Innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate.

26. Is Growth Desirable and Sustainable?
The Antigrowth View – economic growth does not resolve socioeconomic problems such as income inequality.
In Defense of Economic Growth - Economists who support economic growth say that it is the most practical route to the higher standards of living that the vast majority of people desire

27. Is Growth Desirable and Sustainable?
Proponents of economic growth say that pollution occurs, not because of growth, but because common properties are treated as free goods.