Download Growth - McGraw Hill Higher Education

Chapter 9
Growth
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• Explain the benefits of economic growth.
• Calculate the economic growth rate.
• Discuss the short-term and long-term
change in livings standards and calculate
real GDP per capita.
• List the forces driving economic growth.
• Explain the role of government in economic
growth.
• Discuss the history of U.S. productivity
growth.
9-2
The Significance of Growth
• Growth in an economy simply means
that it produces more goods and
services than before.
• Economic growth is important because
it results in a higher standard of living;
thus, people are better off.
• A second benefit of growth is that it
gives us more choices, as the economy
is able to produce more goods and
services.
9-3
Production Possibility Frontier
• The production possibility frontier (PPF) is
defined as all the combinations of different
goods and services that the economy is
capable of producing at a particular time.
• A PPF graph for two outputs, healthcare and
entertainment, is shown on the next slide.
• Economic growth allows the PPF to shift
outward, meaning that the economy can now
produce more healthcare, more entertainment,
or both.
9-4
Production Possibility Frontier
9-5
Growth versus the
Zero-Sum Economy
• A zero-sum economy is one of no growth.
– In this case, to increase the production of one
good, we must cut the production of something
else.
– With no growth, the economy operates on the
same production possibility frontier.
• A growing economy is a non-zero-sum.
– In this case, the production possibility frontier is
shifting outward. It is possible to get more of
both goods.
9-6
Entertainment (more )
Growth and the PPF
x
x
B
A
Production
possibility
frontier today
Production
possibility frontier
next year
Healthcare (more )
9-7
Growth versus the
Zero-Sum Economy
• The growth versus zero-sum argument
can be applied to the distribution of income.
• With no growth, the only way to make lowincome households better off is to take
money away from middle-income or highincome households.
• In a growing economy, it is possible for
everyone to see their incomes rise.
9-8
Measuring Growth
• GDP is a good indicator of growth in the
economy.
• But we must distinguish between nominal
and real GDP.
• Nominal GDP measures the output of an
economy in dollars, not accounting for
inflation.
• Growth of nominal GDP includes both
economic growth and the effect of inflation.
9-9
Real GDP
• The Bureau of Economic Analysis
(BEA) adjusts GDP for inflation using
its estimate of the average price level
in the economy.
• The resulting number is called real
GDP.
• Thus, economic growth, or real GDP
growth, is equal to the growth in
nominal GDP adjusted for inflation.
9-10
Calculating the Growth Rate
• Real GDP in 2003 was $11,841 billion,
measured in 2005 dollars.
• Real GDP in 2004 was $12,264 billion,
measured in 2005 dollars.
• The growth rate from 2003 to 2004
was 3.6%.
• (12,264/11,841) – 1 = 0.036 = 3.6%
9-11
Economic Growth, 1950-2010
9-12
Increase in Living Standards
• To determine how fast the standard of
living is improving, we look at the
change in GDP per capita.
• Real GDP per capita is real GDP
divided by the number of people in the
country.
– In other words, real GDP per capita is the
amount of economic output each person
would get if we split up the entire economy
evenly and gave everyone a piece.
9-13
Calculating Real GDP
per Capita
Real GDP
(Billions of
2005 dollars)
Population
Real GDP
(Millions of per Capita
People) (2005 Dollars)
2005
12,638
296.2
42,688
2006
12,976
299.1
43,384
Percentage
Change
from 2005
to 2006
2.7%
1.0%
1.7%
9-14
Short-Term versus
Long-Term Growth
• Short-term growth is growth on a
year-to-year basis.
• Long-term growth looks at growth
over longer periods.
• The chart on the next slide shows
long-term growth in GDP per capita for
the U.S.
• This shows a steady climb in U.S.
living standards.
9-15
Real GDP per Capita
9-16
What Drives Growth
• Economic growth depends on the
growth in inputs.
• The aggregate production function tells
us what the output, or GDP, of the
economy is, given the following inputs:
– Number of workers, education and skill of
workers, equipment and structures, raw
materials, and land and knowledge.
9-17
The Forces Driving Growth
Increase in
education and skill
level (human
capital)
Increase in
number of
workers
Increase in
equipment and
structures (physical
capital)
Aggregate production
function
Increase in
raw materials
(from land)
Increase in
knowledge
Real GDP
growth
9-18
Number of Workers and
Human Capital
• As the labor force increases, output should
rise as well.
• The labor force is defined as the number of
people working or available for work.
• Besides the number of workers, their
education and skill levels are critical for
growth.
– Human capital is the skill level of the workforce.
– In general, better trained and more educated
workers will produce more.
9-19
College Education and
the Young
9-20
Investment in Physical Capital
• A firm’s purchase of equipment and
buildings for production (physical
capital) is essential for growth.
• Production of any good requires
physical capital.
• Giving workers more and better
equipment will enable them to produce
more.
9-21
Increase in Raw Materials
• Raw materials are an essential input
for growth.
• Raw materials include everything from
oil to bauxite to water.
• Economies consume more raw
materials as they grow.
• Greater use of raw materials has
potentially negative environmental
consequences.
9-22
Increase in Knowledge
• Increases in knowledge are probably the
main source of growth in developed
countries such as the U.S.
• Better knowledge leads to new products
and new methods of production.
• We can produce more goods and
services with the same amount of
resources.
• Increases in knowledge include
improvements in science and technology.
9-23
Government and Growth
• The government plays a key role by setting
the laws and rules under which businesses
operate.
• Some laws and rules encourage growth by
making markets work better.
• Other laws and rules may reduce growth.
• The extent of government intervention in the
economy is subject to intense political debate.
• Example: Chinese government’s policies
shifting long-term growth rate.
9-24
Productivity
• The productivity of an economy is real GDP
for a given year divided by the total number of
hours worked in that year by all workers.
• Higher productivity means that the economy
can produce more output with the same
number of workers.
• The growth rate of productivity is the
percentage increase in productivity over a
year. High productivity growth means that
workers can produce more goods and
services and the company can pay higher
wages.
9-25
History of U.S. Productivity
Growth
9-26