Download Growth

CHAPTER
15
Economic Growth
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1
2
3
4
5
Specify how economic growth is measured.
Describe what GDP per capita and GDP per worker measure.
Illustrate how productivity increases.
Explain how government policy affects growth.
Discuss why economic growth is desirable.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-1
CHAPTER 15
The goal of this chapter is to explorer a long
term view of economic performance.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-2
THE NATURE OF GROWTH
Economic growth refers to increases in the
output of goods and services.
• Measured as an increase in real GDP.
• Short run higher output can come from
efficiently using resources.
• Long lasting higher output requires an
expansion of productive capacity.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-3
THE NATURE OF GROWTH
There are two ways to expand output.
The long run: Expanded
capacity
B
A
0
INVESTMENT GOODS
(quantity per year)
INVESTMENT GOODS
(quantity per year)
The short run: Increased
capacity utilization
C
B
A
0
CONSUMPTION GOODS
(quantity per year)
CONSUMPTION GOODS
(quantity per year) 15-4
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
THE NATURE OF GROWTH
Economists define economic growth in
terms of changes in potential GDP.
• Measured as sustained increases in
total output.
• Reductions in inefficiencies increase
output until producing at capacity.
• Increase in AS leads to an expansion of
production capacity.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-5
THE NATURE OF GROWTH
To achieve long-run growth, AS must shift outward.
DETERMINANTS
Internal market
forces
OUTCOMES
AS
Output
Jobs
External
shocks
Prices
Growth
Policy levers:
Fiscal policy
Monetary policy
Supply Side Policy
AD
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
International
Balance
15-6
GROWTH INDEXES
Measures of economic growth must net
out changes in prices over time.
• Nominal GDP measures value of output
in current prices.
• Changes in value occur from changes in
prices and output.
• Real GDP measures value of output in
constant prices, inflation-adjusted.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-7
GROWTH INDEXES
Changes in real GDP measures economics
growth.
• The growth rate is the percentage
change in real GDP between time
periods.
Growth rate
=
Change in real GDP
Base period GDP
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-8
GROWTH INDEXES
GROWTH RATE (percent per year)
U.S. growth has generally been positive, with
real GDP growing on average 3% per year.
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
-1.0
-2.0
-3.0
-4.0
1970
1975
1980
1985
1990 1995
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without
YEAR
the prior written consent of McGraw-Hill Education.
2000
2005
2010
2015
15-9
GROWTH INDEXES
The Rule of 72 provide the approximate
number of years to double.
Growth Rate (Percent)
Doubling Time (Years)
0.0
Never
0.5
144
1.0
72
1.5
48
2.0
36
2.5
29
3.0
24
3.5
21
4.0
18
4.5
16
5.0
14
The time to double
is 72 divided by the
growth rate.
Growing at 2%
takes 72/2 = 36 yrs.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-10
GROWTH INDEXES
Small changes in growth rates magnify
into large differences in output over time.
• Low growth implies lost output.
• Growth gains from one year accumulate
into higher output in future years.
• Growth is an exponential process.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-11
GROWTH INDEXES
Growth in GDP per capita is only attained
when the growth of output exceeds
population growth.
•
•
•
GDP per capita is total output divided by
total population.
U.S. GDP per capita has more than doubled
since 1980.
Many non-western countries have high
population growth, slowing economic
growth and prosperity.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-12
GROWTH INDEXES
Economies do not grow at the same rate.
GDP per Capita in 1990 International Dollars
Year
0
1000
1500
1820
1995
World
$425
$420
$545
$675
$5,188
The West
$439
$406
$624
$1,149
$19,990
West Europe
$450
$400
$670
$1,269
$17,456
North America
$400
$400
$400
$1,233
$22,933
Japan
$400
$425
$525
$675
$19,720
The Rest
$423
$424
$532
$594
$2,971
Other Europe
$400
$400
$597
$803
$5,147
Latin America
$400
$415
$415
$671
$5,031
China
$450
$450
$600
$600
$2,653
Other Asia
$425
$425
$525
$560
$2,768
Africa
$400
$400
$400
$400
$1,221
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-13
GROWTH INDEXES
Growth in GDP per capita typically raises
living standards.
•
•
•
•
More goods and services produced.
Better goods and services produced.
Increased wealth.
The distribution of gains may not be
equal across individuals.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-14
GROWTH INDEXES
Average U.S. workers today produce twice
as much as their parents did.
Producing more output requires either:
1. Working more hours.
2. Working more productively.
• Productivity is defined as output per
unit of input.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-15
GROWTH INDEXES
Historically, productivity gains have been
a major source of economic growth.
+70%
+50%
+20%
Labor
hours
Output Total
per hour output
• U.S. labor force and
employment grew
faster than population.
• Productivity grew even
faster than labor input.
• Caused U.S. GDP and
GDP per capita to rise.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
15-16
SOURCES OF PRODUCTIVITY GROWTH
There are four sources of productivity
gain.
1.
2.
3.
4.
Labor skills.
Capital intensity.
Resource management.
Technology advances.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-17
SOURCES OF PRODUCTIVITY GROWTH
1. Increases in education and training
improve the quality of the labor force.
• Education and training endow workers
with more skills.
• Workers with more skills leads to
productivity increases.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-18
SOURCES OF PRODUCTIVITY GROWTH
2. Capital increases each worker’s
productivity.
• Investment in more and better tools
and equipment sets up the average
worker to be more productive.
• Capital is a prime determinant of
productivity and growth.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-19
SOURCES OF PRODUCTIVITY GROWTH
3. Entrepreneurship and the quality of
management are major determinants of
economic growth.
• Managers must develop personnel
structures and incentives that make
employees contribute to production.
• Difficult to characterize differences in
management techniques.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-20
SOURCES OF PRODUCTIVITY GROWTH
4. Research and development (R&D) leads
to the upgrading of equipment, processes,
products, and also workers.
R&D includes:
1.
2.
3.
4.
Scientific research.
Product development.
Innovations in production technique.
Development of management
improvements.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-21
POLICY LEVERS
Government policies have a major impact
on whether and how far the AS shifts.
Policies on:
1. Education and training.
2. Immigration.
3. Savings and investment.
4. Deregulation.
5. Economic Freedoms.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-22
POLICY LEVERS
1. Government policies that support
education and training have a several
payoffs.
• Stimulate economy in short run. AD
curve shifts outward.
• Increase production capacity in longrun. AS curve shifts outward.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-23
POLICY LEVERS
2. The quality and quantity of labor are
affected by immigration policy.
• Direct contributor to an outward shift of
production possibilities.
• Immigrants may improve labor
allocation of all workers.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-24
POLICY LEVERS
3. Government stimulates investment
through tax policies.
• Lower taxes on capital gains may
stimulate investment.
• Tax policy is permits short-run
stabilization and increases capacity.
• Tax treatment of capital gains is one of
the most debated policy levers.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-25
POLICY LEVERS
Supply-side economists favor tax
incentives that encourage saving and
investment.
• These policies stimulate production.
• In sharp contrast to Keynes’ emphasis
on stimulating consumption.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-26
POLICY LEVERS
While tax policies promote investment,
budget deficits may reduce private
investment.
• When government finances spending, it
borrows from nation’s savings.
• Potentially crowds out and decreases
private-sector investment.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-27
POLICY LEVERS
Government budget surpluses may crowd
in private investment.
• Crowding in occurs when reductions in
government borrowing increase privatesector borrowing.
• Requires evaluation of impact on shortrun AD and on long-run AS.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-28
POLICY LEVERS
4. Government regulation impacts AS.
• Several types of regulation.
• Limits flexibility of producers to respond
to changes in demand.
• May raise production costs.
• Deregulation potentially stimulates
economic growth.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-29
POLICY LEVERS
Regulation of factor markets include:
• Minimum-wage laws.
• Occupational Safety and Health
Administration (OSHA) standards.
Unintended consequences of these
regulations are fewer people are hired.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-30
POLICY LEVERS
Regulation of markets raises production
costs and restricts supply.
• Supply-side economists suggest
regulatory costs are too high and shifts
AS curve inward.
• Includes regulation of transportation,
financial markets, and food and drug
standards.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-31
POLICY LEVERS
Any government regulation shifts
decision-making power from the private
sector to the public sector.
• Excessive government regulation
reduces economic freedom.
• Nations with the most economic
freedom have the highest GDP per
capita and grow the fastest.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-32
POLICY PERSPECTIVE
Is more growth desirable?
Growth can lead to:
• Congestion.
• Air pollution.
• Depleted natural resources.
The growth debate centers around the mix
of goods and services being provided.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-33