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Transcript
Trends in U.S Economic Growth
Growth in the U.S. Economy
From 1908 to 2008, annual growth in real GDP per
person in the United States averaged 2% .
Real GDP per person fell precipitously during the Great
Depression and rose rapidly during World War II.
Growth was most rapid during the 1960s.
Growth slowed during the 1970s and sped up again in
the 1980s and1990s.
Economic Growth Trends
Economic Growth in U.S. vs. Poor
Countries
 The gaps
between real GDP
per person in the
United States and in
these countries have
widened.
Some economies
are converging
Some are
diverging
Sources of Economic Growth
Economic growth is the sustained, year-on-year increase
in potential GDP.
•Potential GDP is the quantity of real GDP produced
when the quantity of labor employed is the fullemployment quantity.
•Short run fluctuations in real GDP resulting from the
business cycle are not the basis for economic growth
Determinants of Potential GDP
Aggregate production
function
•Real GDP changes as the
quantity of labor changes, other
things held constant.
•An increase in labor increases
real GDP.
•Diminishing marginal returns
cause RGDP to rise at slower
rate as L rises
Determinants of Potential GDP
Aggregate Labor Market
•real wage rate
– money wage rate divided by the price level.
•demand for labor
– shows the quantity of labor demanded as a function of the
real wage rate.
– determined by the marginal product of labor
•supply of labor
–shows the quantity of labor supplied as a function of the
real wage rate.
The Labor Market and Potential GDP
Labor Demand Curve
The demand for labor is the relationship between the
quantity of labor demanded and the real wage rate
when all other influences on hiring plans remain the
same.
Marginal product of labor curve is same as labor demand
curve
 Firms will always hire workers if MP> real wage
 Profit maximizing firm hires until MP= real wage
The Labor Market and Potential GDP
Labor supply curve
shows quantity of labor supplied for each real wage rate.
Quantity of labor supplied increases as the real
wage rate increases for two reasons:
1. Hours per person increase (assuming IE<SE)
Income effect (work less if real wage increases)
Substitution effect (work more if real wage increases)
2. Labor force participation increases
Determinants of Potential GDP
How Potential GDP Grows
Increase in the supply of Increase in demand for
labor
labor
• taxes on workers
• population growth
• demographics
• retirement incentives
• household technology
• more productive labor
•Human capital
• physical capital
• technological improvements
• reduced payroll taxes on
employers
Effect of increase in labor supply
• real wage
• labor hours
• real GDP
• productivity (RDGP per hour)
• real GDP per capita
•depends on whether population increased
Effect of increase in labor demand due to
increased productivity
•Labor demand increases and PF shifts upward.
•real wage
• labor hours
• real GDP
• productivity
• real GDP per capita
Why Labor Productivity Grows
The incentive system created by firms, markets, property
rights, and money.
The growth of labor productivity depends on
•
Physical capital growth
•
Human capital growth
•
Technological advances
Growth Theories and Policies
Classical growth theory
•growth of real GDP per person is temporary
•when GDP per person rises above the subsistence level,
a population explosion eventually brings real GDP per
person back to the subsistence level.
•Malthus – the “dismal science”
Growth Theories and Policies
Modern Growth Theory
Real GDP per person grows because technological
change induces a level of saving and investment that
makes capital per hour of labor grow.
Growth ends only if technological change and/or
incentives for technological change stops.
Growth Theories and Policies
New growth theories
• Real GDP per person grows because of choices that
people make in the pursuit of profit and growth can
persist indefinitely.
•Technological change is driven by profit incentives
• Knowledge is a public good and there may be
increasing returns to knowledge (education)
Growth Theories and Policies
Achieving Faster Growth
Must increase the growth rate of capital per hour of labor
or increase the pace of technological change.
 Policies for growth
• stimulate saving with tax incentives
• stimulate investment with tax incentives and
appropriate regulatory environment (e.g. patents)
•Stimulate research & development.
Growth Theories and Policies
Stimulate Research and Development
•Because the fruits of basic research and development
efforts can be used by everyone, not all the benefit of a
discovery falls to the initial discoverer.
•The market might allocate too few resources to
research and development.
•Government subsidies and direct funding might
stimulate basic research and development.
• Patents can provide incentive to innovate.