Download Chapter 1: Human Misery

Chapter 12:
Economic Growth
Economic Growth
Rate: percentage change in Real GDP over the
previous year. In 1992 prices,
– Real GDP has grown from $2.3 trillion in 1960 to $8.9
trillion in 1999 (average annual growth rate of 3.4%)
– Real GDP is expected to reach about $17 trillion in
2020 (at an average annual growth rate of 3.3%)
Economic Growth
Real GDP growth rate averaged 3.4% in 19601999
– Negative in 1970, 1974-75, 1980, 1982, 1991
– Over 3% in 1964-67, 1968, 1972-73, 1976-78,
1983-85, 1988-89, 1995-97
Business Cycles
Short-run fluctuations of the Real GDP along the
path of long-term growth, consisting of:
–
–
–
–
Expansion or Recovery
Peak or Boom
Contraction or Recession
Trough or Depression
Business Cycle
Real GDP
Path of long-term growth
Peak
Expansion
Recession
Trough
Time
Identifying Business Cycle
The Index of Leading Economic Indicators identifies the
turning points of business cycles. It provides
information about the state of the economy 4 to 6
months ahead.
The Index of Leading Economic Indicators includes
– stock market prices, real money supply, consumer
expectations, interest rate, manufacturing workweek,
unemployment claims, building permits, consumer & capital
goods order, inputs delivery performance
Theories of Business Cycle
Expectations: business optimism & pessimism
Innovations: risk-taking for monopoly profit
Inventory: inventory adjustment lag
Real: fluctuations of long-run actual along potential
GDP
Exogenous: outside events & shocks
Economic Resources
Human or Labor: physical & mental efforts of
workers in production of goods & services
Capital: goods used in production of other goods
(e.g., tools, equipment, buildings)
Natural: gifts of the nature (e.g., water, minerals)
Determinants of Growth
Availability of resources: human, capital, natural
Human capital investment : education, skills
Physical capital investment
Technological advancement
Social capital investment & infrastructure
Efficient and democratic government
International relations
Economic Growth
Good y
Economic growth is illustrated by
an outward shift of the PPC
B
90
60
A
72 100
Good x
Reasons for Growth Slowdown
Labor Force
– Need education and on-the-job-training
– Have part-time or temporary jobs
Saving and Investment
– Low saving ratio: about 15% of GDP
– Slow capital accumulation
Reasons for Growth Slowdown
Composition of Output
– Shift of resources from high-productivity capital goods to lowproductivity consumer goods
Government
– Stringent regulations
– Large and growing public debt