Download Economic growth

Reading for ECON 5000 – Production Theory
Spring 2010
ECONOMIC GROWTH:
The long-run expansion of the economy's ability to produce output. Growth is
attained by increasing the quantity or quality of the economy's resources--labor,
capital, land, and entrepreneurship--through such things as population growth,
investment, exploration, technological innovation, and education. This is one of the
five economic goals and more specifically one of the three macroeconomic goals. The
other goals are full employment, stability, efficiency and equity.
Economic growth is achieved by increasing the economy's ability to produce goods
and services. This goal is best indicated by measuring the growth rate of production.
If the economy produces more goods this year than last, then it is growing.
Economic growth is also indicated by increases in the quantities of the resources-labor, capital, land, and entrepreneurship--used to produce goods. With economic
growth, society gets more goods that can be used to satisfy more wants and needs-people are better off; living standards rise; and scarcity is less of a problem.
Graphical Indications
Production Possibilities
Aggregate Market
1
Economic growth is commonly illustrated by
two basic graphical analyses, production
possibilities model and the aggregate market
model (or AS-AD analysis). Both models are
presented in the exhibit to the right. The
production possibilities model is in the top
panel and the long-run aggregate supply
curve used in the aggregate market model is
in the bottom panel.


Production Possibilities: Economic
growth is indicated by an outward
shift of the production possibilities
frontier in the top panel. To illustrate
economic growth, click the [Growth]
button under the production
possibilities frontier. The production
possibilities frontier represents the
maximum output produced with available resources and current technology.
If society has more resources or better technology, then it can produce more
output and the frontier shifts outward.
Aggregate Market: Economic growth is indicated by a rightward shift of the
long-run aggregate supply curve in the bottom panel. To illustrate economic
growth, click the [Growth] button under the long-run aggregate supply curve.
The long-run aggregate supply curve is constructed based on the assumption
that flexible prices have enabled full employment of existing resources. If the
quantity or quality of the resources increases, the full employment level of
production also increases, leading to a rightward shift of the vertical long-run
aggregate supply curve.
Sources of Economic Growth
An economy is able to achieve the goal of economic growth by increasing the
quantity or quality of the resources. Consider a few of the more important examples.





Quantity of Labor: The quantity of labor increases in three basic ways: (1)
natural population growth, (2) immigration from other countries, and (3)
higher labor force participation rate.
Quantity of Capital: The quantity of capital increases through the production
of capital goods, which inevitably involves a tradeoff with the production of
consumption goods. This tradeoff is generally termed investment.
Quantity of Natural Resources: The quantity of natural resources that are
available for production is increased through exploration. The natural
resources already exist (naturally), but they can be used for production only
after their existence and location is known.
Quality of Labor: The primary means of increasing the quality of labor is
through education, either formal schooling or informal on-the-job training.
Quality of Capital: The primary means of increasing the quality of capital is
through technological advances
Investment
2
Economic growth can be achieved in several different ways. However, each method
involves the fundamental process of investment. Investment is the sacrifice of
current benefits or rewards to pursue an activity with expectations of greater future
benefits or rewards. In its simplest form investment means giving up consumption
goods and producing capital goods.
The quantity and quality sources of economic growth all involve investment in one
way or another. Increasing the quantity of capital is an obvious example. Exploration
for natural resources, such as drilling for oil, also fits most common sense notions of
investment. However, increasing in the quantity of labor also reflects investment.
Parents sacrifice their own consumption to raise a family. Immigrants sacrifice as
they travel to a new country.
The acquisition of education is also an investment, exemplified by college students
who sacrifice four to five years of early adulthood for a college degree. The
development of technology is also an investment with resources devoted to scientific
research rather than being used for other production.
The bottom line is that economic growth is achieved through investment. Without
investment, there is no economic growth.
The Problems of Economic Growth
The macroeconomic goal of economic growth is generally acknowledged as a
beneficial pursuit. Almost everyone gains from economic growth. Unlike other
economic goals, conservatives and liberals usually agree that economic growth is
good for society.
However, everything has a down side and economic growth is no exception.



Lifestyle Losses: One concern with economic growth is the loss of traditional
lifestyles. New products, new technologies, faster transportation, and other
changes that accompany economic growth also tend to disrupt traditional
ways of living. For example, families might find themselves scattered across
the country.
Generational Transfers: Another concern with economic growth is the transfer
of income and wealth from one generation to the next. One generation makes
the investment in capital, technology, or education, but the next generation
then reaps the reward of this growth. One example is public education for the
young financed by taxes on the elderly. Some question whether or not it is
fair for some, like the elderly, to sacrifice with no prospects of personally
benefitting from the investment.
Disamenities: A third problem with economic growth is an increase in
disamenities, such as pollution, congestion, and natural resource depletion. In
that economic growth means more production of "goods", it also means the
generation of more "bads." The automobile, for example, improves travel but
causes air pollution.
<= ECONOMIC GOOD
ECONOMIC GROWTH, PRODUCTION
POSSIBILITIES =>
3
Recommended Citation:
ECONOMIC GROWTH, AmosWEB Encyclonomic WEB*pedia,
http://www.AmosWEB.com, AmosWEB LLC, 2000-2010. [Accessed: February 28,
2010].
ECONOMIC GROWTH, PRODUCTION POSSIBILITIES:
Economic growth is the process of increasing the economy's ability to produce goods
and services. It is achieved by increasing the quantity or quality of resources. This
process can be illustrated as an outward shift of the production possibilities curve.
Production possibilities, which analyzes the alternative combinations of two goods
that an economy can produce with given resources and technology, indicates
economic growth with an outward shift of the production possibilities curve. The
general method of achieving economic growth is by increasing the quantities or
qualities (Q and Q) of the resources.
The Growth Process
Economic growth is demonstrated by an
outward shift of the production possibilities
curve. The curve presented in the exhibit to
the right shows the production possibilities
tradeoff between crab puffs on the vertical
axis and storage sheds on the horizontal axis.
With existing resources and technology, the
economy can produce any combination of
crab puffs and storage sheds up to or on the
production possibilities curve. However, it
cannot produce any combination of
production beyond the curve, such as point
M.
While point M cannot be reached today with
existing resources and current technology, it
can be reached tomorrow through economic
growth. Growth expands the frontier, causing
4
Shifting The Curve
it to shift outward.
To illustrate the process of economic growth, click the [Growth] button. Point M can
be reached when economic growth expands the frontier. Once the process is
completed, point M lies ON the new production possibilities curve. Another success
story achieved through the miracle of economic growth.
Resource Quantities
One of two ways to achieve economic growth is by increasing resource quantities.
Three notable resource quantity options are:

Labor:
o
o
o

Capital: The key to getting more capital is investment, giving up satisfaction
today to get capital tomorrow.
Materials: The key to increasing the quantities of materials is through
exploration. Exploration is best illustrated by digging or drilling into the
Earth's crust in search of mineral or fossil fuel deposits.

The quantity of labor can be increased through:
Natural population growth.
Immigration from other nations.
More participation and fewer nonworkers.
Resource Qualities
The other way to achieve economic growth is to increase resource qualities. Two
important resource quality options are:


Education: Education increases the quality of labor resources. Better educated
workers are more productive workers. Education includes both formal, sittingin-a-classroom learning and informal, on-the-job-training experience.
Technology: Technology is the knowledge and information society as a whole
possesses concerning the production of goods and services. Better technology
enables more production. Technology concerns all aspects of production, but
it is often seen as an improvement in the quality of capital.
<= ECONOMIC GROWTH
ECONOMIC GROWTH, SOURCES =>
Recommended Citation:
ECONOMIC GROWTH, PRODUCTION POSSIBILITIES, AmosWEB Encyclonomic
WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2010. [Accessed:
February 28, 2010].
5
ECONOMIC GROWTH, SOURCES:
Economic growth, the process of increasing the economy's ability to produce goods
and services, can be achieved by increasing the quantity or quality of resources. The
quantity option can include increases in the quantities of labor, capital, land, or
entrepreneurship. The quality option primarily includes improvements in technology
and human capital.
The two primary methods of achieving economic growth are increasing the quantity
and quality of resources, what might be termed the Q and Q of economic growth.
Each method expands the economy's production capabilities, which can result in a
greater quantity of production that can then lessen the fundamental problem of
scarcity. Economic growth is commonly illustrated as either an outward shift of the
production possibilities curve or a rightward shift of the long-run aggregate supply
curve.
Resource Quantity
The first, and perhaps most obvious, method of achieving economic growth is to
increase the quantities of available resources. A direct implication of scarcity is that
limited resources mean limited production of goods and services. If those resources
are less limited, then production can be greater.
Labor: Labor--human effort--is involved in virtually every act of production, from
mining manganese to baking bread. As such, if the economy has more workers, then
it can produce more goods. The quantity of labor is typically expanded in three ways:



The first is natural population growth. Because labor is people, more births
today, mean more workers in 20 years. So long as the birth rate exceeds the
death rate, the size of the population increases. Once these people reach
working age, then the labor force also expands.
Immigration from other nations is a second way. Workers who move from one
country to another immediately add to the labor force of the destination
nation. Industrialized countries, such as the United States, have always relied
on the immigration of workers from other nations to expand the quantity of
labor.
The third way is an increase in the labor force participation rate. That is, to
have a larger fraction of the population engaged in working. Every society has
hunters and gathers who work, and couch potatoes who do not. The pool of
labor increases when a larger fraction of the population is willing and able to
work.
Capital: The factories, machinery, equipment and other capital goods that workers
use to assist their production efforts are critical to economic growth. Capital must be
produced using resources that could have been used to make something else--such
as a want-or-need satisfying hot fudge sundae. This act of producing capital, which
enables greater future production but which means giving up goods that would have
provided current satisfaction, is commonly termed investment.
Natural Resources: Natural resources provide the economy with the materials that
are transformed into goods. If the economy has more materials, then it can produce
goods. Because natural resources are natural, that is, they come with the planet, the
6
key to increasing their quantity is not creating more so much as just finding them.
This is the basic act of exploration, which has historically included "discovering" new
lands like European explorers did in the 1600s or like U.S. settlers did when they
expanded westward in the 1800s. However, in modern times, exploration usually
takes the form of digging or drilling into the Earth's crust in search of mineral or
fossil fuel deposits.
Resource Quality
The second method of achieving economic growth is to increase the qualities of
available resources, that is, to improve the productivity of a given quantity of
resources.
Education: The Quality of Labor: Education is the primary method of increasing
the quality of labor resources. This also goes by the term human capital. Better
educated workers are more productive workers. Education can be of the formal,
sitting-in-a-classroom variety that awards diplomas and forces students to expand
their conceptual understanding. Or it can be of the informal, on-the-job-training
variety that comes from experience and learning-by-doing. Both methods--formal
education and experience--are valuable methods of increasing human capital and the
quality of labor. Some knowledge is best acquired through formal education and
some is best obtained by just doing it.
Technology: The Quality of Production: Technology is the knowledge and
information that society as a whole possesses about the production of goods and
services. Improving technology makes it possible to produce more output with the
same resources or to use fewer resources to produce the same output, that is, to
improve technical efficiency. While technology concerns all aspects of production, it
most often surfaces in the quality of capital. That is, the economy uses technological
improvements to build better, technically more efficient, machinery and tools.
<= ECONOMIC GROWTH,
PRODUCTION POSSIBILITIES
ECONOMIC PROFIT =>
Recommended Citation:
ECONOMIC GROWTH, SOURCES, AmosWEB Encyclonomic WEB*pedia,
http://www.AmosWEB.com, AmosWEB LLC, 2000-2010. [Accessed: February 28,
2010].
7