1. Economic growth
Chapter 8
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2. Economic growth (8.1) Either:
An increase in real GDP (or real GDP per capita) occurring over some time period
[(Real GDP year 2-real GDP year 1)/real GDP year 1] x 100
Real GDP per capita = Real GDP/size of population
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3. Growth as a Goal Widely held economic goal
Growth leads to an increase in wages & improved standard of living
Economy is better able to meet people’s wants & resolve socioeconomic problems
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4. Arithmetic of Growth Small changes in growth make a HUGE difference
Rule of 70
Tells us how many years it will take for real GDP to double
Formula:
70/annual percentage rate of growth
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5. Growth in the U.S.
Since 1950, real GDP has increased about sixfold but the U.S. population has also increased
Real GDP per capita has increased more than threefold
Real GDP has grown at an annual rate of about 3.5 percent since 1950 and per capita has increased about 2.3 percent
Reasons why:
Improved products & services
Added leisure (standard workweek has shrunk from 50 hours to approx. 35)
Other impacts
2c. These measures of growth do not account for any effects growth may have on the environment & the quality of life. If growth hurts the environment and creates a stressful work environment, the growth numbers will overstate the gains in well-being that result from growth.
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6. Uneven distribution of growth (8.2)
The different starting dates for modern economic growth is the main cause of the differences in per capita GDP levels seen today
Catching up is possible
People can adopt technology more quickly than they can invent it
Leader countries – inventing & implementing new technology is slow & costly so the growth is smaller
Follower countries – can grow much faster because they simply adopt existing technology
1. Europe – early 1800’s…US, Canada, & Australia – mid 1800’s…Japan – 1870’s…rest of Asia – early to mid 1900’s…Central & South America & Middle East
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7. Institutional structures that promote growth (8.3)
Strong property rights
Patents & copyrights
Efficient financial institutions
Literacy & widespread education
Free trade
A competitive market system
These structures promote & sustain modern economic growth in poor follower countries
People will not invest if they believe others will steal their investments or their expected returns.
If society wants a constant flow of innovative new technologies & ideas, patents & copyrights are necessary. Before patents were issued, many inventors & authors had their ideas stolen before they could make a profit
Needed to channel the savings generated by households toward the businesses, entrepreneurs, & inventors that do most of society’s investing & inventing.
Without highly educated inventors, new technologies do not get developed.
Promotes economic growth by allowing specialization
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8. Ingredients of growth Supply factors
Four of the ingredients of economic growth relate to the physical ability of the economy to expand
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
Demand factor
Households, businesses, & government must purchase the economy’s expanding output of goods & services
Efficiency factor
To reach its full production potential, an economy must achieve economic efficiency as well as full employment
2a. When that occurs, there will be no unplanned increases in inventories & resources will remain fully employed. Economic growth requires increases in total spending to realize the output gains made available by increases production capacity.
3a. The economy must use its resources in the least costly way to produce the specific mix of goods & services that maximizes people’s well-being (allocative efficiency).
Supply, demand, & efficiency factors in economic growth are related. Unemployment caused by insufficient total spending (demand factor) may lower the rate of new capital accumulation (supply factor)
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9. Production possibilities analysis
Labor & productivity – Society can increase its real output and income in two fundamental ways:
Increasing its inputs of resources
Raising the productivity of those inputs
Real GDP = hours of work x labor productivity
Hours of work
Depends on size of employed labor force & length of average workweek
Labor productivity
Determined by technological progress, quantity of capital goods available to workers, quality of labor itself, & efficiency with which inputs are allocated, combined, & managed
A nation’s economic growth from one year to the next depends on its increase in labor inputs (if any) and its increase in labor productivity (if any)
3. Productivity rises when the health, training, education, & motivation of workers improve; when workers have more & better machinery & natural resources with which to work/ when production is better organized & managed; and when labor is re-allocated from less-efficient industries to more-efficient industries.
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10. Accounting for growth Growth accounting
Used by Council of Economic Advisors (CEA)
Assesses the relative importance of supply-side elements that contribute to changes in real GDP (i.e. hours of work & labor productivity)
Labor inputs vs. labor productivity – When both are increasing, it’s an important sources of economic growth
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11. Technological advance
Largest contributor to productivity growth
Accounts for about 40% of productivity growth
Includes not only innovative production techniques but new managerial methods & new forms of business organization
Generated by discovery of new knowledge which allows resources to be combined in improved ways that increase output
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12. Quantity of capital
Increased capital explains roughly 30% of productivity growth
More & better plant & equipment make workers more productive
Some capital substitutes for labor, but most capital is complementary to labor (making labor more productive)
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13. Education & training Human capital
Knowledge & skills that make a worker productive
Investment in human capital
Includes not only formal education but also on-the-job training
An estimated 15% of productivity growth is derived from investments in people’s education & skills
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14. Economies of scale & resource allocation
Explains the remaining 15% of productivity growth
Reductions in per-unit production costs that result from increases in output levels
Markets have increased in size over time
This allows firms to increase output levels
Able to use larger, more productive equipment
Use new methods of manufacturing & delivery that increase productivity
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15. Improved Resource Allocation
Means workers over time have moved from low-productivity employment to high-productivity employment
I.E. moving from agriculture to manufacturing jobs to technology
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16. Recent productivity acceleration (8.4)
Microchip & information technology
Widespread availability of personal & laptop computers stimulated the desire to tie them together (Internet & e-commerce)
First…Why has productivity increased relative to earlier periods?
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17. New firms & increasing returns
Increasing returns- situation in which a % increase in the amount of inputs a firm uses leads to an even larger % increase in the amount of output the firm produces
Firms can exploit several different sources of increasing returns & economies of scale
More specialized inputs
Spreading of development costs
Simultaneous consumption
Network effects
Learning by doing
2a. Firms can use more specialized & thus more productive capital & workers as they expand their operations.
2b. Firms can spread high product development costs over greater output
2c. Many recently developed products & services can satisfy large numbers of customers at the same time (i.e. computer software delivered on a CD at very low expense)
2d. Increases in the value of the product to each user, including existing users , as the total # of users rises. I.E. Software & Internet service become more beneficial to a buyer the greater the # of households and businesses that also buy them.
2e. Firms that produce new products or pioneer new ways of doing business experience increasing returns by learning by doing.
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18. What can we conclude?
Prospects for a lasting increase in productivity growth are good
Time will tell if productivity growth will be a long-run sustainable trend
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19. Is growth desirable & sustainable?
Antigrowth view
Critics state that growth results in pollution, global warming, ozone depletion, & other environmental problems.
Also, little evidence that economic growth solves problems such as poverty, homelessness, & discrimination
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20. In defense of economic growth
Enables a society to do the following:
Improve the nation’s infrastructure
Enhance care for the sick & elderly
Provide greater access for the disabled
Provide more police & fire protection
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