Download Section 7 - Module 37-38-39-40

Section 7 - Module 37-3839-40
Economic Growth
Module 37
1. What is GDP?
2. What is GDP per Capita?
3. What’s the difference between Real GDP and Nominal GDP?
Module 37
1.
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M). Here is a
description of each GDP component: C (consumption) is normally the largest GDP component in the economy,
consisting of private (household final consumption expenditure) in the economy.
2.
The total GDP divided by the amount of people in a country.
3.
Taking the nominal gdp and accounting for inflation to get real GDP
Module 37
1. Comparing Economies Across
Time and Space
a. Real GDP per capita
i. Real GDP divided by the
population size
ii. Focus on this bc it isolates the
effect of changes in the pop.
iii. Serves as a summary measure of
a country’s economic progress
over time
b. Figure 37.1 - while China and India have
Module 37
Question: If there are 2000 people in a country and the total Real GDP is $4
million - what is the GDP per capita?
Module 37
Module 37
1. Growth Rates
a. Mathematical formula that tells us how long it takes real GDP per capita - or other variables to double.
i. Number of years for variable to double = 70/Annual Growth rate of variable
b. Rule of 70 only applied to positive growth rate
c. Ex. If the GDP per capita grows at 1% per ear, it will take 70 years to double.
Module 37
1. Based on the chart and the Rule
of 70, how long will it take
_____ to double?
a. China
b. India
c. Ireland
d. US
2. Why can’t we use the rule of 70
on Zimbabwe?
3. If the growth rate of a country
Module 37
1. Sources of Long-Run Growth
a. Labor Productivity i. Output per worker, or output per hour
ii. Output per worker = Real GDP / # of people working
iii. Rising productivity = #1 reason for long-run economic growth
b. Why?
i. Rate of employment growth is near the rate of population growth.
ii. Real GDP per capita must be the result of increased output per worker.
Module 37
1. Explaining Growth in Productivity
a. Physical Capital
i. Manufactured goods used to produce other goods and services
ii. Buildings, machinery
b. Human Capital
i. Improvement in labor created by the education and knowledge in the workforce
ii. Increased education = increased human capital
c. Technology
i. Improves labor productivity
Module 38
1. Accounting for Growth: The Aggregate Production Function
a. Aggregate Production Function
i. Shows how productivity depends on the quantities of physical capital per worker and
human capital per worker as well as technology.
ii. Allows economists to see the effects of the 3 factors on overall productivity
iii. Formula on page 376
2. Which of the following does not affect the level of productivity?
a. Education of workforce
b. Size of labor force
Module 38
1. Human Capital
a. Education of workforce
2. Physical Capital
a. Tools people use
3. Technology
a. Advances = more productivity
4. Capital Stock
a. Term on test - referring to overall capital (human and physical)
Module 38
1. Technological Progress and
Productivity Growth
a. Tech progress shifts curve upward
b. Change in years shows progress of tech
on productivity
c. Shift from A to C = increased savings =
increased investment
d. Shift from C to D = improvements in
tech, education, healthcare, etc.
Module 38 - Key Terms
1. Diminishing Returns to Physical Capital
a. Holding the amount of human capital per worker and the state of technology fixed, each
successive increase in the amount of physical capital per worker leads to smaller increase in
productivity
2. Growth Accounting
a. Estimate the contribution of each major factor in the aggregate production function to
economic growth.
3. Total Factor Productivity
a. Is the amount of output that can be achieved with a given amount of factor inputs.
Module 39
1. Why Growth Rates Differ
a. Capital, Tech, and Growth Differences
i. Adding to Physical Capital
1. Increased stock of physical capital at rapid rates = high rates of investment
spending
2. Where does the money come from?
a. Savings = investment!
b. Increased Savings = increased investment = higher growth of physical
capital
1. Why growth rates differ - part 2
a. Adding to Human Capital
i. Higher education levels - higher human capital
ii. Ex. East asia has higher increases in education than Latin America
iii. See table 39.1 for side by side comparison
Module 39
1. Why Growth Rates Differ - Part 3
a. Technological progress
i. Advance of tech is key behind economic growth
b. R&D - Research and Development
i. Spending to create new tech and prep for practical use
Module 39
1. The Role of Government in Promoting Economic Growth
a. Governments and Physical Capital
i. Infrastructure
1. Roads, power lines, ports, information networks and other physical capital that
provide a foundation for economic activity
b. Govt & Human Capital
i. Govt spending on education
ii. Taxes for public schools for primary and secondary
2. What are your thoughts on the government supporting the payment of higher
Module 39
1. Role of Govt Continued
a. Govt and Technology
i. Mostly private investment, but some R&D done by govt agencies, such as Brazil govt
researching soil and helping develop new varieties of crops
b. Political Stability, etc.
i. Political Stability and protection of property rights are crucial for long-run econ. Growth
ii. Laws and institutions help stability & less corruption
Module 39
1. Is World Growth Sustainable?
a. What is sustainability?
i. Whether it can continue in the face of limited supply of natural resources
b. Natural Resources and Growth
i. Read over pages 391-392 for further clarifications
2. Negative Externalities
a. The cost that individuals or firms impose on others without having to offer compensation.
3. What global impact does increased productivity have on the world and
environment? What are the pros and cons?
Module 39
1. Look at Module 39.3 for Climate change and country growth.
2. Countries that are increasing production also increase carbon dioxide
emissions.
a. Which country has the most?
b. Who was the country that produced the most before that country?
Module 39
1. What’s the general economist conclusion about climate change and economic
growth?
a. Global climate change is a problem, but market incentives and government actions can help.
Module 40
Read and complete Tackling the Test problems on page 403 #1-5