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PART 2: GDP, GROWTH AND FLUCTUATIONS CHAPTER 6 Economic Growth Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited 1 In This Chapter You Will Learn: • Learning Objective 6.1: What economic growth is and how it is measured • Learning Objective 6.2 : About the institutional structures an economy needs if it is to experience modern economic growth • Learning Objective 6.3 : About the ingredients required for economic growth and how they relate to the production possibilities analysis • Learning Objective 6.4 : About the sources of growth in Canada • Learning Objective 6.5: About the recent productivity acceleration • Learning Objective 6.6: About differing perspectives on whether growth is desirable and sustainable 2 6.1 Economic Growth • Economists define and measure economic growth as either: – An increase in real GDP occurring over some time period. – An increase in real GDP per capita occurring over some time period. LO6.1 3 Real GDP per Capita • The real GDP per person, found by dividing real GDP by a country’s population LO6.1 4 Growth as a Goal • Growth is a widely held economic goal – some critics argue, but most agree with the desired results of economics growth and the resultant increase in the standard of living • Growth lessens the burden of scarcity – bigger pie generally means most get a bigger piece LO6.1 5 Arithmetic of Growth • Rule of 70: Approximate number of years required to double real GDP For example, a 5% annual rate of growth will double real GDP in about 14 years (= 70/5) LO6.1 6 Growth in Canada: Table 6-1 Real GDP and Per Capita GDP Source: Statistics Canada. GDP, income-based at: http://www40.statcan.ca/l01/cst01/econ03-eng.htm, and Real GDP, expenditure-based at: http://www40.statcan.ca/l01/cst01/econ05-eng.htm, various years. Accessed May 6, 2009. LO6.1 7 But we must qualify these numbers in several ways: • Improved Products and Services – Data understate growth of economic well being – In 1960s, computers were owned by few, whereas today, practically every family has one which is more powerful than computers of 1960s – We also have cell phones • Added Leisure • Other Impacts LO6.1 8 6.2 Modern Economic Growth • The historically recent phenomenon in which nations have experienced sustained increases in real GDP per capita – starts with Industrial Revolution about 250 years ago LO6.2 9 Economic growth has vastly affected cultural, social and political arrangements • Culturally: for the first time in history ordinary people have significant time for leisure activities and the arts • Socially: has allowed for universal public education, elimination of ancient social norms and legal restrictions against women and minorities doing certain jobs or holding certain positions • Politically: countries experiencing modern economic growth have tended to move toward democracy LO6.2 10 The Uneven Distribution of Growth • Modern economic growth has spread slowly from its British birthplace • First advanced to France, Germany, and other parts of Western Europe in the early 1800s before spreading to Canada, the United States, and Australia by the late 1800s. • Japan began to industrialize in the 1870s • The rest of Asia did not follow until the early to mid 1900s, at which time large parts of Central and South America as well as the Middle East also began to experience economic growth. • Africa for the most part did not experience sustained economic growth until the past 20 years • Some parts of the world have yet to experience economic growth at all. LO6.2 11 The different starting dates for modern economic growth are the main cause of the differences in per capita GDP levels seen today LO6.2 12 Catching Up Is Possible • Leader countries: As it relates to economic growth, countries that develop and use advanced technologies, which then become available to follower countries. • Follower countries: As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries – can grow at a much faster pace LO6.2 13 Table 6-2 LO6.2 14 Institutional Structures That Promote Growth • • • • • • Strong Property Rights Patents and Copyrights Efficient Financial Institutions Literacy and Education Free Trade Competitive Market System LO6.2 15 6.3 Ingredients of Growth • Six “ingredients” of economic growth: • Four are supply factors, i.e. changes in the physical and technical agents of production, namely: 1. Increases in the quantity and quality of natural resources, 2. Increases in the quantity and quality of human resources, 3. Increases in the supply (or stock) of capital goods, and 4. Improvements in technology. LO6.3 16 Fifth Ingredient of Economic Growth 5. Demand factor: The increase in the level of aggregate demand that brings about the economic growth made possible by an increase in the production potential of the economy LO6.3 17 Sixth Ingredient of Economic Growth 6. Efficiency factor: The capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors make possible. LO 6.3 18 Economic Growth and the Production Possibilities Curve Capital Goods C Economic Growth A c b a B D Consumer Goods 25-19 Production Possibilities Analysis • LABOUR AND PRODUCTIVITY Labour productivity: The average product of labour; output per worker per hour Real GDP = worker hours x labour productivity Or, % change in GDP = % change in worker hours + % change in productivity LO6.3 20 Worker hours affected by labour force participation rate • Labour force participation rate: The percentage of the working age population that is actually in the labour force LO6.3 21 The Supply Determinants of Real Output Real GDP = hours of work x labour productivity • Size of employed labour force Labour Inputs (hours of work) • Average hours of work x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other 25-22 = Labour Productivity (average output per hour) Real GDP Accounting for Growth in Canada • Output growth in Canada has been considerably greater in the last half century than can be attributed solely to increases in the inputs of labour and capital • Two other factors are involved: 1. Interindustry shifts from lower- to higher productivity occupations, e.g. the shift of workers out of relatively low-productivity farming to higher-productivity urban industry 2. Multifactor productivity (MFP), i.e. the efficiency with which factors are used together in the production process LO6.4 23 Table 6-3 Sources of Growth of Real GDP, 1981-2007* LO6.4 24 Reasons for Growth • • • • • Inputs versus productivity Quantity of labour Technological advances Quantity of capital Education and training LO6.4 25 Economies of Scale and Resource Allocation • Economies of scale: Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run • Improved resource allocation: workers have moved over time from low-productivity employment to high-productivity employment LO6.4 26 6.1 Global Perspective 6.5 Recent Productivity Acceleration • Reasons for the Productivity Acceleration: 1. The microchip and information technology 2. New firms and increasing returns: More Specialized Inputs Spreading of Development Costs Simultaneous Consumption Network Effects Learning-by-Doing 3. Global competition LO6.5 28 Implication: More-Rapid Economic Growth • Stronger productivity growth and heightened global competition allow the economy to achieve a higher rate of economic growth LO6.5 29 What Can We Conclude? • The prospects for a lasting increase in productivity growth are good • Time will tell LO6.5 30 6.6 Is Economic Growth Desirable and Sustainable? • The Anti-Growth View: • Industrialization and growth result in pollution, global warming, ozone depletion, and other environmental problems • No evidence that economic growth has solved sociological problems such as poverty, homelessness, and discrimination • Growth permits us to “make a better living,” it does not give us “the good life” • doubt that high growth rates are sustainable LO6.6 31 Is Economic Growth Desirable and Sustainable? • In Defense of Growth: • It is the path to the greater material abundance and higher living standards desired by the vast majority of people • Economic growth has not made labour more unpleasant or hazardous • Growth has allowed economies to reduce pollution, and be more sensitive to environmental considerations • Growth is sustainable since economic growth has more to do with the expansion and application of human knowledge and information than extractable natural resources. LO6.6 32 The Last Word: Economic Growth in China • Growth averages past 25 years: – 9% annual growth output – 8% annual growth output per capita • • • • • • Labour more productive More international trade Transition to market economy Joined WTO 2001 Financial system remains weak Income inequality across geographic areas Chapter 6 Summary 6.1 Economic Growth 6.2 Modern Economic Growth 6.3 Ingredients of Growth 6.4 Accounting for Growth in Canada 6.5 Recent Productivity Acceleration 6.6 Is Economic Growth Desirable and Sustainable? Chapter 6 34