Download Economic growth - Woodhaven High School

Chapter 8
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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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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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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:

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70/annual percentage rate of growth
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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
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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
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Institutional structures that
promote growth (8.3)
 Strong property rights
 Patents & copyrights
 Efficient financial institutions
 Literacy & widespread education
 Free trade
 A competitive market system
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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
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efficiency as well as full employment
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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
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to workers, quality of labor itself, & efficiency with which inputs are
allocated, combined, & managed
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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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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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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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Education & training
 Human capital
 Knowledge & skills that make a worker productive
 Investment in human capital


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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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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

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Use new methods of manufacturing & delivery that increase
productivity
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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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Recent productivity acceleration
(8.4)
 Microchip & information technology
 Widespread availability of personal & laptop computers
stimulated the desire to tie them together (Internet & ecommerce)
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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
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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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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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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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