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Chapter 26
Economic Growth
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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
26-2
Economic Growth
LO1
• Growth in U.S. real GDP 1950-2012
• Increased more than sixfold
• 3.1% per year
• Growth in U.S. real GDP per capita
• Increased more than 3 fold
• At roughly 2% per year
• Qualifications
• Improved products and services
• Added leisure
• Other impacts
26-3
Economic Growth
Real GDP and Real GDP per Capita
LO1
26-4
Modern Economic Growth
• Began with the Industrial Revolution in late
1700s
• Ongoing increases in living standards
• Time for leisure
• Social change
• Democracy
• Human lifespan doubled
LO2
26-5
Modern Economic Growth
• Began in Britain
• Has spread slowly
• Starting date main cause of worldwide
differences in living standards
• Catching up is possible
• Leader countries invent technology
• Follower countries adopt technology
• Can grow faster
LO2
26-6
Modern Economic Growth
Country
United States
United Kingdom
France
Ireland
Japan
Singapore
Hong Kong
South Korea
LO2
Real GDP
per capita,
1960
$ 14,766
11,257
9,347
6,666
5,472
4,149
3,849
1,765
Real GDP
per capita,
2010
$41,365
34,268
31,299
34,877
31,477
55,862
38,865
26,609
Average annual
growth rate,
1960-2010
2.1%
2.2
2.4
3.3
3.5
5.2
4.6
5.4
Note: GDP figures for all countries are measured in “international dollars” of equal value
to U.S. dollars in 2005.
Source: Penn World Table version 7.1, pwt.econ.upenn.edu. Used by permission of the
Center for International Comparisons at the University of Pennsylvania
26-7
Modern Economic Growth
LO2
26-8
Institutional Structures of Growth
•
•
•
•
•
•
LO2
Strong property rights
Patents and copyrights
Efficient financial institutions
Literacy and widespread education
Free trade
Competitive market system
26-9
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
26-10
Determinants of Growth
• Demand factor
• Households, businesses, and government
must purchase the economy’s expanding
output
• Efficiency factor
• Must achieve economic efficiency and full
employment
LO3
26-11
Production Possibilities
From Chapter 1:
C
Capital Goods
A
Economic
Growth
c
a
B
LO3
b
D
Consumer Goods
26-12
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)
26-13
U.S. Economic Growth
Accounting for the Growth of U.S. Real GDP,
1953-2011, Plus Projection from 2011-2022
(Average Annual Percentage Changes)
Item
1953 Q2
To 1973 Q4
Increase in real GDP
1973 Q4
To 1995 Q4
1995 Q4
To 2001 Q1
2001 Q1
To 2011 Q1
Projected
2011 Q1
To 2021 Q4
3.6
2.8
3.8
1.7
2.5
Increase in quantity of labor
1.1
1.3
1.4
-0.7
0.2
Increase in labor productivity
2.5
1.5
2.4
2.4
2.3
Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2010, p. 76
Economic Report of the President 2011, p. 52; Bureau of Economic Analysis; Bureau of Labor Statistics.
LO3
26-14
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%)
LO4
26-15
Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, 2011
Mathematics
LO4
Science
26-16
Productivity Growth
• Average rate of growth
• 1.5% per year 1973-1995
• 2.4% per year 1995-2012
• Affects real output, real income, and real
wages
• Pay higher wages without lowering profit
LO5
26-17
Productivity Growth
• Microchip/information technology
• Start-up firms and increasing returns
• Sources of increasing returns
• More specialized inputs
• Spreading of development costs
• Simultaneous consumption
• Network effects
• Learning by doing
• Global competition
LO5
26-18
Productivity Growth
LO5
26-19
Economic Growth
• Is economic growth desirable and 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
LO6
26-20
Economic Growth
• Growth is the path to greater material
abundance
• Results in higher standards of living
• Increases leisure time
• Allows for the expansion and application of
human knowledge
LO6
26-21
Global Perspective
LO6
26-22
Can Economic Growth Survive
Population Decline?
• As nations industrialize, their economies shift
from agriculture to industry
• Fertility rates fall
• Decrease in population
• Each generation smaller than the one
before
• Inverse dependency ratio
• Social security issues
• Innovation and productivity
26-23