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ECONOMIC
GROWTH
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Economic Growth
Learning Objectives:
Students will be able to thoroughly and completely explain:
1. The 4 key supply factors that impact economic growth.
2. The factors that limit growth.
Key Growth Factors
1. Increases in the Quantity & Quality of Natural
Resources
2. Increases in the Quantity & Quality of Human
Resources
3. Increases in the Supply (or Stock) of Capital Goods
4. Improvements in Technology
5. Households, Businesses, and Government Must
Purchase the Economy’s Expanded Output
6. The Economy Must Achieve Economic Efficiency
(productive and allocative) as well as Full
employment
Key growth factors
4 Supply Factors that make growth possible
• Increases in the Quantity & Quality of Natural
Resources
• Examples of natural resources?
• Questions:
•Where will we get the resources?
•How will we get the resources?
•Who will we compete with to get the
resources?
Solve this problem using the tools of monetary
and fiscal policy available
A Problem solving strategy
1. Create a solution that will deliver the desired
result.
2. Find a way to make the solution work.
3. Select the best tool from monetary and fiscal
policy that will bring your solution to life.
Problem
• You are in charge of economic policy
• Your mission is to increase the rate of growth of
U.S. GDP from 0% to 4% per year in 3 years.
• You can use the tools of monetary policy and
fiscal policy
• You are to focus on increasing the quantity
and/or quality of natural resources to achieve
your goal. Please try to avoid adding to the
global warming problem.
• How would you solve this problem?
Key growth factors
Supply Factors that make growth possible
• Increases in the Quantity & Quality of Human
Resources
•Questions:
•Where will we get the resources?
•How will we get the resources?
•Who do we compete with to get the
resources?
•What will we do with the resources that
are of lower “quality”?
Key growth factors
Supply Factors that make growth possible
Increases in the Supply (or Stock) of Capital
Goods
Example of capital goods?
•What capital goods will we increase the
supply of?
•Who will pay for those capital goods?
•What is the rationing mechanism for
determining what goods will be produced
and which ones will not?
Key growth factors
Supply Factors that make growth possible
Improvements in Technology
•Examples of technological improvements?
•Questions:
•Which technologies should we improve or
grow?
•Who should pay for that?
•Who should get them?
Key growth factors for growth to be realized
Demand Factor
• Households, Businesses, and Government Must
Purchase the Economy’s Expanded Output
•No unplanned inventories
•Resources fully employed
Remember the circular flow model?
•Questions:
•How should we increase demand?
•How should we manage the increase in demand?
•How long will we be able to increase demand?
Key growth factors for growth to be realized
Efficiency Factor
• The Economy Must Achieve Economic
Efficiency (productive and allocative) as well as
Full employment
• Questions:
•How can we achieve / approach productive efficiency?
•How can we achieve /approach allocative efficiency?
•How can we achieve full employment?
Production Possibilities Analysis
Demand and efficiency factors make it real
Economic
Growth
Capital Goods
C
A
b
a
0
B
D
Consumer Goods
Production Possibilities Analysis
Increase inputs and increase productivity of those
inputs to raise real output and income.
Labor and Productivity
Labor productivity – real output per hour of work.
Hours
Labor
X
Real GDP =
of Work
Productivity
Total output = worker hours x labor productivity
Labor Productivity – measured by real output per
worker hour.
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
Labor
Inputs
(hours of
work)
x
Labor
Productivity
(average
output per
hour)
=
Real
GDP
Accounting for Growth
Sources of productivity growth
Technological Advance - largest contributor to
increases in the productivity of American labor – 40%
Quantity of Capital – 30%
Education and Training - Human Capital – 15%
Nation's infrastructure - public capital goods such as
highways and sanitation systems, levee systems,
bridges, water systems
Changes in the Educational Attainment
of the U.S. Adult Population
GLOBAL PERSPECTIVE
Average Test Scores, 8th. Grade, 1999
Mathematics
Rank
Score
1 Singapore
604
2 South Korea
587
3 Taiwan
585
4 Hong Kong(China) 582
5 Japan
579
6 Belgium
558
7 Netherlands
540
8 Slovak Republic 534
9 Hungary
532
10 Canada
531
19 United States
502
Rank
Science
1 Taiwan
2 Singapore
3 Hungary
4 Japan
5 South Korea
6 Netherlands
7 Australia
8 Czech Republic
9 United Kingdom
10 Finland
18United States
Score
569
568
552
550
549
545
540
539
538
535
515
Source: Third International Math and Science Study
Accounting for Growth
Average Test Scores of Eighth Grade Students in Math & Science,
Top 10 Countries and the United States, 2003
Mathematics
1
2
3
4
5
6
7
8
9
10
15
Singapore
South Korea
Hong Kong
Taiwan
Japan
Belgium
Netherlands
Estonia
Hungary
Malaysia
United States
Science
605
589
586
585
570
537
536
531
529
508
504
1 Singapore
2 Taiwan
3 South Korea
4 Hong Kong
5 Estonia
6 Japan
7 Hungary
8 Netherlands
9 United States
10 Australia
578
571
558
556
552
552
543
536
527
527
Accounting for Growth
Accounting for Growth of U.S. Real GDP,
1953-2013 (average annual percentage changes)
Item
1953 Q2
to
1973 Q4
Increases in Real GDP 3.6
Increases in
Quantity of Labor
1.1
Increases in
Labor Productivity
2.5
*Beyond 2007 are Projections
1973 Q4
to
1995 Q2
1995 Q2
to
2001 Q1
2001 Q1
to
2007 Q3
2007 Q3
to
2013 Q4*
2.8
3.8
2.6
2.8
1.3
1.4 -0.1
0.3
Source: Economic Report of the President, 2008
1.5
2.4
2.7
2.5
Accounting for Growth
Sources of productivity growth
Economies of Scale - large producers may be
able to use more efficient technologies than
smaller producers
Improved Resource Allocation - The historical
reallocation of labor from agriculture to
manufacturing in the United States has
increased the average productivity of labor. -
15%
Productivity Acceleration:
A New Economy?
Based on 1995 – 2002 growth
Reasons for the Productivity Acceleration
• Microchip and Information Technology
• Start-Up Firms
• New Firms and Increasing Returns
Productivity Acceleration:
A New Economy?
Sources of Increasing Returns
• More Specialized Inputs
• Spreading of Development Costs
• Simultaneous Consumption
• Network Effects - Increases in the value of a
product to each user, including existing
users, as the total number of users rises
• Learning by Doing
• Global Competition
Productivity Acceleration:
A New Economy?
Macroeconomic Implications of stronger
productivity growth and greater global
competition.
• More Rapid Economic Growth
• Low Natural Rate of Unemployment
• Growing Tax Revenues
Skepticism About the New Economy - too soon to judge
whether the high productivity advances between 1995
and 2002 are permanent or transitory.
Productivity Acceleration:
A New Economy?
Proponents of the New Economy –
Innovations in computers and
communications, together with global
capitalism, are greatly boosting U.S.
productivity and the economy's potential
economic growth rate.
Is Growth Desirable and Sustainable?
The Antigrowth View – economic growth
does not resolve socioeconomic
problems such as income inequality.
In Defense of Economic Growth Economists who support economic
growth say that it is the most practical
route to the higher standards of living
that the vast majority of people desire
Is Growth Desirable and Sustainable?
Proponents of economic growth
say that pollution occurs, not
because of growth, but because
common properties are treated as
free goods.