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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-environment, quality of
life
LO1
25-3
Modern Economic Growth
• Began with the Industrial Revolution
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•
LO2
in late 1700s
Ongoing increases in living standards
Time for leisure
Social change-education, social
status, women
Democracy
Human lifespan doubled
25-4
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
25-5
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
25-6
Modern Economic Growth
LO3
25-7
Institutional Structures of Growth
• Strong property rights
• Patents and copyrights
• Efficient financial institutions-banks
• Literacy and widespread education
• Free trade-specialization, new
ideas, but also movement of jobs
• Competitive market systemeconomic and political freedom,
regulation, hard work, immigration
LO3
25-8
Determinants of Growth
Supply factors
Demand factor
• Increases in quantity
• Households, businesses,
and quality of natural
and government must
resources
purchase the economy’s
• Increases in quality and
expanding output
quantity of human
resources
Efficiency factor
• Increases in the supply
• Must achieve economic
(or stock) of capital goods
efficiency and full
• Improvements in
employment
technology
LO3
25-9
Accounting for Growth
• Real GDP= hours of work x labor productivity
• Factors affecting productivity growth
• Technological advance (40%)
• New prod. Techniques, managerial methods,
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•
•
LO3
improved processes
Quantity of capital (30%)
• Saving and investing in new plant and equipment
Education and training (15%)
• Human capital-the knowledge and skill that make a
worker productive
• Mixed bag-more college educated but we’re
behind many other nations in science and math.
Economies of scale and resource allocation (15%)
25-10
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-is that really what’s happened?
25-11
Productivity Growth
• Microchip/information technology
• New firms and increasing returns
• Sources of increasing returns
• More specialized inputs-inventory management
•
LO4
systems, accounting, marketing
• Spreading of development costs-over MORE units
• Simultaneous consumption-e-books, software programdeveloped once and cheap to reproduce
• Network effects-interconnectivity-Facebook, Gmail
• Network effect-magnifies the value of the output.
• Learning by doing
Global competition-trade deals, increased capitalism
• Allowed businesses to expand beyond national borders
25-12
Economic Growth
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•
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•
LO5
Is economic growth desirable and sustainable?
Macroeconomist Robert Gordon-The Death of Innovation
The antigrowth view
• Environmental and resource issues
• Growth doesn’t solve issues such as poverty, income
inequality
• Productivity but wage don’t keep up.
In defense of economic growth
• Higher standard of living
• Growth can improve infrastructure, increase household
incomes
• Human imagination can solve environmental and
resource issues
Economic Growth
• Growth is the path to greater material
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•
•
LO5
abundance
Results in higher standards of living
Increases leisure time
Allows for the expansion and
application of human knowledge
25-14
Global Perspective
LO5
25-15