1. The production possibilities frontier: Growth
P1Session 8
The production possibilities frontier: Growth

2. Economic Growth
The expansion of production possibilities—and increase in the standard of living—is called economic growth.
You can have some fun and generate some discussion by getting the students to think about what life might be like after another 200 years of economic growth. Provide some numbers: In 2002, income per person in the United States was about $100 a day. In 1802 it was about 70¢ a day, and if the past growth rate prevails for another 200 years, in 2202 it will be $14,000 a day. Emphasize the magic of compound growth. If they think that $14,000 a day is a big income, get them to do a ballpark estimate of the daily income of Bill Gates (about $14 million!) Encourage a discussion of why scarcity is still present even at these large incomes.
Be sure to cover the “Standard of Living Tradeoff” idea that the students met in Chapter 1 and that they can now think about with the more powerful tool of the PPF.
If you wish, connect the discussion of efficiency with that of growth. Ask the students to explain what determines the efficient growth rate (not in text).

3. Economic Growth Two key factors influence economic growth:
The Cost of Economic Growth
Two key factors influence economic growth:
Technological change
Capital accumulation
Technological change is the development of new goods and of better ways of producing goods and services.
Capital accumulation is the growth of capital resources, which includes human capital.

4. Economic Growth Capital vs Consumer Goods
To use resources in research and development and to produce new capital, we must decrease our production of consumption goods and services.
Consumer or consumption goods are final goods and services which bring direct satisfaction to the user and are important for current living standards (e.g. Food).
Capital goods refer to man made assets which are used in the production of other goods and bring satisfaction in a roundabout (indirect) way. The production of capital goods means investment today (a sacrifice of consumer goods and current living standards) to secure future growth and living standards (e.g. factories, schools)

5. Economic Growth Capital vs Consumer Goods
Consumer goods although being important for current living standards, are not considered a potential source of economic growth.
However, capital goods, although not important for current living standards, are vital for increasing the future capacity of the economy and hence ability to produce more(consumer) goods in the future.
For this reason, capital accumulation is an important source of economic growth.

6. Economic Growth Figure 2.5 illustrates the trade-off we face.
We can produce pizza or pizza ovens along PPF0.
By using some resources to produce pizza ovens, the PPF shifts outward in the future.

7. Economic Growth in the European Union and Hong Kong
In 1970, Hong Kong’s production possibilities (per person) were much smaller than those in the European Union.

8. Economic Growth
By 2004, Hong Kong’s production possibilities (per person) were about the same as those in the European Union.
Hong Kong grew faster than the European Union because it devoted more of its resources to capital accumulation.