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McGraw-Hill/Irwin

Economic Growth

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LO1 Economic Growth

• Increase in real GDP or real GDP per capita over some time period • • • Percentage rate of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP = 70 annual percentage rate of growth 25-2

LO1 Economic Growth

• Growth in U.S. real GDP 1950-2009 • Increased 6 fold • 3.2% per year • • Growth in U.S. real GDP per capita • Increased more than 3 fold • 2% per year Qualifications • Improved products and services • • Added leisure Other impacts 25-3

LO1 Economic Growth

Real GDP and Real GDP per Capita (1) Year 1950 1960 1970 1980 1990 2000 2009 (2) Real GDP, Billions of 2 2005$ $ 2006 2831 4270 5839 8034 11,226 12,987 (3) Population, Millions 152 181 205 228 250 282 307 (4) Real GDP, Per Capita, 2005$ (2) ÷ (3) $12,197 15,640 20,829 25,610 32,136 39,809 42,303 Source: Bureau of Economic Analysis,

http://www.bea.gov

and U.S. Census Bureau

, http://www.census.gov

25-4

LO2 Modern Economic Growth

• Began with the Industrial Revolution in late 1700s • • • • • Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled 25-5

LO2 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 25-6

Modern Economic Growth LO2

Country Real GDP per capita, 1960 Real GDP per capita, 2007 United States $ 14,766 $42,887 United Kingdom 11,257 32,181 France 9,347 29,663 Ireland Japan Singapore Hong Kong South Korea 6,666 5,473 4,149 3,849 1,765 41,625 30,585 44,619 43,121 23,850 Figures are in 2005 dollars Average annual growth rate, 1960-2007 2.3% 2.3

2.5

4.0

3.7

5.2

5.3

5.7

Source: Penn World Table version 6.3, pwt.econ.upenn.edu

25-7

LO3 Modern Economic Growth

25-8

LO3 Institutional Structures of Growth

• • • • • • Strong property rights Patents and copyrights Efficient financial institutions Literacy and widespread education Free trade Competitive market system 25-9

LO3 Determinants 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 25-10

LO3 Determinants of Growth

• • Demand factor • Households, businesses, and government must purchase the economy’s expanding output Efficiency factor • Must achieve economic efficiency and full employment 25-11

LO3 Production Possibilities

From Chapter 1:

C A Economic Growth a c b B D Consumer Goods

25-12

LO3 Labor and Productivity

Real GDP = hours of work x labor productivity •

Size of employed labor force

•

Average hours of work

• • • • •

Technological advance Quantity of capital Education and training Allocative efficiency Other x Labor Inputs (hours of work) Labor Productivity (average output per hour) = Real GDP

25-13

U.S. Economic Growth

Accounting for the Growth of U.S. Real GDP, 1953-2007, Plus Projection from 2009-2020

LO3 Item

Increase in real GDP

1953 Q2 To 1973 Q4

Increase in quantity of labor Increase in labor productivity 3.6

1.1

2.5

1973 Q4 To 1995 Q4 1995 Q4 To 2001 Q1

2.8

1.3

1.5

3.8

1.4

2.4

2001 Q1 To 2007 Q3

2.6

-0.1

2.7

Projected 2009 Q1 To 2020 Q4

2.5

0.2

2.3

(Average Percentage Changes)

Source:

Derived from

Economic Report of the President, 2008,

p. 45; and

Economic Report of the President, 2010,

p. 76 25-14

LO3 Accounting for Growth

• Factors affecting productivity growth • • • • Technological advance (40%) Quantity of capital (30%) Education and training (15%) Economies of scale and resource allocation (15%) 25-15

LO3 Accounting for Growth

Average Test Scores of Eighth Grade Students in Math and Science, 2007

Mathematics Science

25-16

LO4 Productivity Growth

• • • Average rate of growth • • 1.5% per year 1973-1995 2.8% per year 1995-2009 Affects real output, real income, and real wages Pay higher wages without lowering profit 25-17

Productivity Growth LO4

• • • • 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 Global competition 25-18

LO5 Productivity Growth

25-19

LO5 Economic Growth

• Is economic growth desirable and sustainable?

• • The antigrowth view • Environmental and resource issues In defense of economic growth • • Higher standard of living Human imagination can solve environmental and resource issues 25-20

LO5 Economic Growth

• Growth is the path to greater material abundance • • • Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge 25-21

LO5 Global Perspective

25-22

LO5 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 areas 25-23