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Chapter 3
Growth
These slides supplement the
textbook, but should not
replace reading the textbook
Why is growth
important?
Because things wear
out, they deteriorate
over time.
2
Is absolute growth or
relative growth important?
Relative growth is more
important because a
decline in the rate of growth
could precipitate an
increase in unemployment.
3
Shifts in the Economy’s PPF
An increase in productivity
A'
A
F F'
Capital goods
4
What will happen if
we do not grow?
Things will wear out, each day
we have less and less, and
unemployment worsens.
5
Shifts in the Economy’s PPF
A decrease in productivity
A
A''
F''F
Capital goods
6
How can we
increase GDP?
More investment this year,
higher GDP next year
7
What is the Austrian
view of growth?
Save and invest in a free
market. Saving is
defined as money
earned but not spent.
8
What is the
Keynesian view of
growth?
Stimulate demand.
9
What type of
growth is best?
Slow and steady
10
Is it reasonable to
believe we can
eliminate slumps?
Keynesians would say
"yes." Austrians tend
to believe that slumps
are inevitable.
11
How do we
measure growth?
Gross Domestic Product
(GDP) which is a
measure of all "new" and
"final" goods and services
produced in any one year
12
What is
new and final?
New goods are goods
that did not exist last
year. A final good is the
end result of the
industrial process.
13
What are examples
of new and final?
Lumber would be an
intermediate good, the
house that was built with
the lumber is a final good.
14
When is measuring
GDP useful?
If we measure real GDP
from one year to the next
over a span of time we
can know where we are
going and how fast.
15
What is "real" GDP
and "money" GDP?
Money GDP is not
adjusted for inflation,
real GDP factors out
the variable of inflation.
16
Once we calculate
real GDP from year to
year, how do we
calculate the percent
increase or decrease?
We take the difference
between the 2
numbers and divide by
the original number.
17
What is an example?
From 3 to 5 is a 67%
increase, 2 / 3 = 67.
From 5 to 3 is a 40%
decrease, 2 / 5 = 40%
18
Who finds this
information most useful?
Keynesians find these
measurements more
useful than do Austrians.
19
What is the
“rule of man”?
The practice of putting
oneself above the
law when one has
the authority.
20
What is the
“rule of law”?
There is a respect
and adherence to
the law and secure
property rights.
21
What is the basis of
the
“rule of law”?
Secure property rights.
22
How does the rule of law
and the rule of man relate
to growth in Japan?
 Laws favored savers.
 Loan money to
favored persons.
23
How does moral hazard
relate to Japan?
Japan has supported
failing companies
24
What is moral hazard?
Companies which are
not allowed to fail will
have the incentive to
take huge risks.
25
What are hindrances
to growth?
• Rule of man dominates.
• Excessive taxes.
• Excessive regulations.
• Large national debt.
26
What is the key to
growth?
Increase productivity.
27
How can consumers
buy things at
reasonable prices?
Competition whereby lower
costs will lead to lower
prices and more profit
28
What is productivity?
The ratio of a specific
measure of output to a
specific measure of input
29
When does
productivity increase?
When the units of output is
more than the units of input
30
How do we increase
productivity?
Produce more per
unit of time at a
lower per unit cost.
31
How do we increase
productivity?
Inventions and Innovations.
32
If we did away with
machines, would more
people have jobs?
No, workers would
be less productive
without machines
33
Does automation
lead to
unemployment?
No, the more machines
we have the more
jobs we will have.
34
Why does an increase
productivity lead to
economic growth?
 Lower costs lead to lower
prices
 the lower prices leads to an
increase in buying power
 the increase in aggregate
demand leads to growth
35
What factors lead to an
increase in productivity?
 Inventions (more and
better capital)
 growth in human capital
 Innovations
 economies of scale
 mobile labor force
36
What is innovation?
A new way of doing something
37
What is a
specialization of labor?
Focusing an individual’s
efforts on a particular
product or a single task
38
Why does the assembly
line increase productivity?
 Eliminates nonproductive
activity
 Repetition faster
 Better use of capital
39
How does the
specialization of
labor increase
productivity?
40
 Takes advantage of
individual natural abilities
 Allows workers to develop
more experience at a
particular task
 Permits the introduction of
labor-saving machinery
 Reduces time required to
shift between tasks
41
What does the term
economies of scale mean?
A companies average costs
decrease over the long run
as the company grows,
growth can be global
42
Why is America becoming
less competitive around
the world?
Economies of scale are
hampered internationally by
government regulations –
trade restrictions
43
Why do lengthy and
complex laws hinder
productivity?
Laws against wearing a tie
can be easily understood
and enforced.
Laws against wearing a
beautiful tie cannot be easily
understood or enforced.
44
What are some examples of
government regulation?
• Glass Steagall Act of 1933
• Financial Services Modernization
Act of 1999
• Sarbanes-Oxley Act of 2002
• 2700 page Health Care Bill 2010
• Financial Reform Bill of 2010
• The Volcker Rule 2010
• Keystone XL Pipeline decision 2011
45
What does the housing
market have to do with a
mobile labor force?
Many people are upside down
on their mortgages and
cannot relocate very easily
46
What does our growing
national debt have to do
with growth?
The more we pay in interest
the less we have to invest,
especially when so much of
the interest is paid to
foreigners
47
What does monetizing
the debt have to do
with growth?
Money creation leads to
inflation and inflation distorts
price signals, erodes buying
power, and leads to more
unemployment
48
What is the concept of
crowding out?
The more the government
borrows the less savings is
available for business and
consumers to borrow
49
What happens to
productivity as the economy
slips into a recession?
It increases as the less
productive workers are laid
off and the more productive
workers make up more of
the labor force
50
Which companies are hurt
the most when costs
increase?
Companies who face a
relatively elastic
demand curve.
51
END