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25
Economic Growth
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Growth
• Increase in real GDP or real GDP per
•
•
•
capita over some time period
Percentage rate of growth
Growth as a goal
Arithmetic of growth: Rule of 70
Approximate
number of years
required to double
real GDP
LO1
70
=
annual percentage rate
of growth
25-2
Economic Growth
• Growth in U.S. real GDP 1950-2009
• Increased 6 fold
• 3.2% per year
• Growth in U.S. real GDP per capita
• Increased more than 3 fold
• 2% per year
• Qualifications
• Improved products and services
• Added leisure
• Other impacts
LO1
25-3
Economic Growth
Real GDP and Real GDP per Capita
LO1
(4)
Real GDP,
Per Capita,
2005$
(2) ÷ (3)
(1)
Year
(2)
Real GDP,
Billions of 2
2005$
1950
$ 2006
152
$12,197
1960
2831
181
15,640
1970
4270
205
20,829
1980
5839
228
25,610
1990
8034
250
32,136
2000
11,226
282
39,809
2009
12,987
307
42,303
(3)
Population,
Millions
Source: Bureau of Economic Analysis, http://www.bea.gov
and U.S. Census Bureau, http://www.census.gov
25-4
Modern Economic Growth
• Began with the Industrial Revolution
•
•
•
•
•
LO2
in late 1700s
Ongoing increases in living standards
Time for leisure
Social change
Democracy
Human lifespan doubled
25-5
Modern Economic Growth
• Began in Britain
• Has spread slowly
• Starting date main cause of worldwide
•
LO2
differences in living standards
Catching up is possible
• Leader countries invent technology
• Follower countries adopt technology
• Can grow faster
25-6
Modern Economic Growth
Country
Real GDP
per capita,
1960
United States
$ 14,766
United Kingdom
11,257
France
9,347
Ireland
6,666
Japan
5,473
Singapore
4,149
Hong Kong
3,849
South Korea
1,765
Real GDP
per capita,
2007
$42,887
32,181
29,663
41,625
30,585
44,619
43,121
23,850
Average annual
growth rate,
1960-2007
2.3%
2.3
2.5
4.0
3.7
5.2
5.3
5.7
Figures are in 2005 dollars
Source: Penn World Table version 6.3, pwt.econ.upenn.edu
LO2
25-7
Modern Economic Growth
LO3
25-8
Institutional Structures of Growth
• Strong property rights
• Patents and copyrights
• Efficient financial institutions
• Literacy and widespread education
• Free trade
• Competitive market system
LO3
25-9
Determinants of Growth
• Supply factors
• Increases in quantity and quality
of natural resources
• Increases in quality and quantity
of human resources
• Increases in the supply (or stock)
of capital goods
• Improvements in technology
LO3
25-10
Determinants of Growth
• Demand factor
• Households, businesses, and
•
LO3
government must purchase the
economy’s expanding output
Efficiency factor
• Must achieve economic efficiency
and full employment
25-11
Production Possibilities
From Chapter 1:
Capital Goods
C
A
Economic
Growth
c
b
a
B
D
Consumer Goods
LO3
25-12
Labor and Productivity
Real GDP = hours of work x labor productivity
• Size of
employed
labor force
Labor
Inputs
(hours of
work)
• Average
hours of
work
x
• Technological
advance
• Quantity of
capital
• Education and
training
• Allocative
efficiency
• Other
LO3
=
Real
GDP
Labor
Productivity
(average
output per
hour)
25-13
U.S. Economic Growth
Accounting for the Growth of U.S. Real
GDP, 1953-2007, Plus Projection from
2009-2020
1953 Q2
To 1973 Q4
Item
Increase in real GDP
1973 Q4
To 1995 Q4
1995 Q4
To 2001 Q1
2001 Q1
To 2007 Q3
Projected
2009 Q1
To 2020 Q4
3.6
2.8
3.8
2.6
2.5
Increase in quantity of labor
1.1
1.3
1.4
-0.1
0.2
Increase in labor productivity
2.5
1.5
2.4
2.7
2.3
(Average Percentage Changes)
Source: Derived from Economic Report of the President, 2008, p. 45;
and Economic Report of the President, 2010, p. 76
LO3
25-14
Accounting for Growth
• Factors affecting productivity growth
• Technological advance (40%)
• Quantity of capital (30%)
• Education and training (15%)
• Economies of scale and resource
allocation (15%)
LO3
25-15
Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, 2007
Mathematics
LO3
Science
25-16
Productivity Growth
• Average rate of growth
• 1.5% per year 1973-1995
• 2.8% per year 1995-2009
• Affects real output, real income, and
•
LO4
real wages
Pay higher wages without lowering
profit
25-17
Productivity Growth
• Microchip/information technology
• New firms and increasing returns
• Sources of increasing returns
• More specialized inputs
• Spreading of development costs
• Simultaneous consumption
• Network effects
• Learning by doing
• Global competition
LO4
25-18
Productivity Growth
LO5
25-19
Economic Growth
• Is economic growth desirable and
•
•
LO5
sustainable?
The antigrowth view
• Environmental and resource issues
In defense of economic growth
• Higher standard of living
• Human imagination can solve
environmental and resource issues
25-20
Economic Growth
• Growth is the path to greater material
•
•
•
LO5
abundance
Results in higher standards of living
Increases leisure time
Allows for the expansion and
application of human knowledge
25-21
Global Perspective
LO5
25-22
Economic Growth in China
• Growth averages past 25 years:
• 9% annual growth output
• 8% annual growth output per capita
• Labor more productive
• More international trade
• Transition to market economy
• Joined WTO 2001
• Financial system remains weak
• Income inequality across areas
LO5
25-23