Download 6.6 Is Economic Growth Desirable and Sustainable?

PART 2: GDP, GROWTH AND
FLUCTUATIONS
CHAPTER 6
Economic Growth
Slides prepared by Bruno Fullone,
George Brown College
© 2010 McGraw-Hill Ryerson Limited
1
In This Chapter You Will Learn:
• Learning Objective 6.1: What economic growth is and how it is
measured
• Learning Objective 6.2 : About the institutional structures an
economy needs if it is to experience modern economic growth
• Learning Objective 6.3 : About the ingredients required for
economic growth and how they relate to the production
possibilities analysis
• Learning Objective 6.4 : About the sources of growth in Canada
• Learning Objective 6.5: About the recent productivity
acceleration
• Learning Objective 6.6: About differing perspectives on whether
growth is desirable and sustainable
2
6.1 Economic Growth
• Economists define and measure economic
growth as either:
– An increase in real GDP occurring over some time
period.
– An increase in real GDP per capita occurring over
some time period.
LO6.1
3
Real GDP per Capita
• The real GDP per person, found by dividing real
GDP by a country’s population
LO6.1
4
Growth as a Goal
• Growth is a widely held economic goal – some
critics argue, but most agree with the desired
results of economics growth and the resultant
increase in the standard of living
• Growth lessens the burden of scarcity – bigger
pie generally means most get a bigger piece
LO6.1
5
Arithmetic of Growth
• Rule of 70:

Approximate number of years required to double real
GDP

For example, a 5% annual rate of growth will double
real GDP in about 14 years (= 70/5)
LO6.1
6
Growth in Canada: Table 6-1
Real GDP and Per Capita GDP
Source: Statistics Canada. GDP, income-based at: http://www40.statcan.ca/l01/cst01/econ03-eng.htm, and Real GDP,
expenditure-based at: http://www40.statcan.ca/l01/cst01/econ05-eng.htm, various years. Accessed May 6, 2009.
LO6.1
7
But we must qualify these
numbers in several ways:
• Improved Products and Services
– Data understate growth of economic well being
– In 1960s, computers were owned by few, whereas
today, practically every family has one which is more
powerful than computers of 1960s
– We also have cell phones
• Added Leisure
• Other Impacts
LO6.1
8
6.2 Modern Economic Growth
• The historically recent phenomenon in which
nations have experienced sustained increases in
real GDP per capita – starts with Industrial
Revolution about 250 years ago
LO6.2
9
Economic growth has vastly
affected cultural, social and political
arrangements
• Culturally: for the first time in history ordinary
people have significant time for leisure activities
and the arts
• Socially: has allowed for universal public
education, elimination of ancient social norms and
legal restrictions against women and minorities
doing certain jobs or holding certain positions
• Politically: countries experiencing modern
economic growth have tended to move toward
democracy
LO6.2
10
The Uneven Distribution of
Growth
• Modern economic growth has spread slowly from its British
birthplace
• First advanced to France, Germany, and other parts of
Western Europe in the early 1800s before spreading to
Canada, the United States, and Australia by the late 1800s.
• Japan began to industrialize in the 1870s
• The rest of Asia did not follow until the early to mid 1900s, at
which time large parts of Central and South America as well as
the Middle East also began to experience economic growth.
• Africa for the most part did not experience sustained
economic growth until the past 20 years
• Some parts of the world have yet to experience economic
growth at all.
LO6.2
11
The different starting dates for modern economic
growth are the main cause of the differences in per
capita GDP levels seen today
LO6.2
12
Catching Up Is Possible
• Leader countries: As it relates to economic
growth, countries that develop and use
advanced technologies, which then become
available to follower countries.
• Follower countries: As it relates to economic
growth, countries that adopt advanced
technologies that previously were developed
and used by leader countries – can grow at a
much faster pace
LO6.2
13
Table 6-2
LO6.2
14
Institutional Structures That
Promote Growth
•
•
•
•
•
•
Strong Property Rights
Patents and Copyrights
Efficient Financial Institutions
Literacy and Education
Free Trade
Competitive Market System
LO6.2
15
6.3 Ingredients of Growth
• Six “ingredients” of economic growth:
• Four are supply factors, i.e. changes in the physical
and technical agents of production, namely:
1. Increases in the quantity and quality of natural
resources,
2. Increases in the quantity and quality of human resources,
3. Increases in the supply (or stock) of capital goods, and
4. Improvements in technology.
LO6.3
16
Fifth Ingredient of Economic
Growth
5. Demand factor: The increase in the level of
aggregate demand that brings about the
economic growth made possible by an increase
in the production potential of the economy
LO6.3
17
Sixth Ingredient of Economic
Growth
6. Efficiency factor: The capacity of an economy to
combine resources effectively to achieve growth
of real output that the supply factors make
possible.
LO 6.3
18
Economic Growth and the
Production Possibilities Curve
Capital Goods
C
Economic
Growth
A
c
b
a
B
D
Consumer Goods
25-19
Production Possibilities
Analysis
• LABOUR AND PRODUCTIVITY
 Labour productivity: The average product of labour;
output per worker per hour
 Real GDP = worker hours x labour productivity
 Or,
 % change in GDP = % change in worker hours + %
change in productivity
LO6.3
20
Worker hours affected by
labour force participation rate
• Labour force participation rate: The percentage
of the working age population that is actually in
the labour force
LO6.3
21
The Supply Determinants of Real
Output
Real GDP = hours of work x labour productivity
• Size of
employed
labour force
Labour
Inputs
(hours of
work)
• Average
hours of
work
x
• Technological
advance
• Quantity of
capital
• Education and
training
• Allocative
efficiency
• Other
25-22
=
Labour
Productivity
(average
output per
hour)
Real
GDP
Accounting for Growth in
Canada
• Output growth in Canada has been considerably
greater in the last half century than can be
attributed solely to increases in the inputs of labour
and capital
• Two other factors are involved:
1. Interindustry shifts from lower- to higher productivity
occupations, e.g. the shift of workers out of relatively
low-productivity farming to higher-productivity urban
industry
2. Multifactor productivity (MFP), i.e. the efficiency with
which factors are used together in the production
process
LO6.4
23
Table 6-3 Sources of Growth
of Real GDP, 1981-2007*
LO6.4
24
Reasons for Growth
•
•
•
•
•
Inputs versus productivity
Quantity of labour
Technological advances
Quantity of capital
Education and training
LO6.4
25
Economies of Scale and
Resource Allocation
• Economies of scale: Reductions in the average
total cost of producing a product as the firm
expands the size of plant (its output) in the long
run
• Improved resource allocation: workers have
moved over time from low-productivity
employment to high-productivity employment
LO6.4
26
6.1 Global Perspective
6.5 Recent Productivity
Acceleration
• Reasons for the Productivity Acceleration:
1. The microchip and information technology
2. New firms and increasing returns:
 More Specialized Inputs
 Spreading of Development Costs
 Simultaneous Consumption
 Network Effects
 Learning-by-Doing
3. Global competition
LO6.5
28
Implication: More-Rapid
Economic Growth
• Stronger productivity growth and heightened
global competition allow the economy to
achieve a higher rate of economic growth
LO6.5
29
What Can We Conclude?
• The prospects for a lasting increase in
productivity growth are good
• Time will tell
LO6.5
30
6.6 Is Economic Growth
Desirable and Sustainable?
• The Anti-Growth View:
• Industrialization and growth result in pollution,
global warming, ozone depletion, and other
environmental problems
• No evidence that economic growth has solved
sociological problems such as poverty,
homelessness, and discrimination
• Growth permits us to “make a better living,” it
does not give us “the good life”
• doubt that high growth rates are sustainable
LO6.6
31
Is Economic Growth Desirable
and Sustainable?
• In Defense of Growth:
• It is the path to the greater material abundance and
higher living standards desired by the vast majority
of people
• Economic growth has not made labour more
unpleasant or hazardous
• Growth has allowed economies to reduce pollution,
and be more sensitive to environmental
considerations
• Growth is sustainable since economic growth has
more to do with the expansion and application of
human knowledge and information than extractable
natural resources.
LO6.6
32
The Last Word: Economic Growth in
China
• Growth averages past 25 years:
– 9% annual growth output
– 8% annual growth output per capita
•
•
•
•
•
•
Labour more productive
More international trade
Transition to market economy
Joined WTO 2001
Financial system remains weak
Income inequality across geographic areas
Chapter 6 Summary
6.1 Economic Growth
6.2 Modern Economic Growth
6.3 Ingredients of Growth
6.4 Accounting for Growth in Canada
6.5 Recent Productivity Acceleration
6.6 Is Economic Growth Desirable and Sustainable?
Chapter 6
34