Download Why Real GDP Grows

CHAPTER
15
Growth,
Inflation and
Cycles
After studying this chapter you will be able to:
 Define economic growth rate and explain the
implications of sustained growth
 Describe the economic growth trends in the UK and
other countries and regions
 Explain the sources of economic growth
 Explain how demand-pull and cost-push forces bring
cycles in inflation and output
 Explain the main theories of the business cycle
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In China, India and some other Asian economies, real GDP
doubles in seven years.
In the UK, real GDP doubles every 25 years or so.
In many African economies, real GDP barely changes.
Why?
What makes an economic miracles like the ones we see in
East Asia today?
Will economic growth in Asia continue or come to an end?
Why do some countries stagnate?
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The Basics of Economic Growth
Economic growth is the sustained expansion of
production possibilities measured as the increase in real
GDP over a given period.
Calculating Growth Rates
The economic growth rate is the annual percentage
change of real GDP.
The economic growth rate tells us how rapidly the total
economy is expanding.
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The Basics of Economic Growth
The standard of living depends on real GDP per person.
Real GDP per person is real GDP divided by the
population.
Real GDP per person grows only if real GDP grows faster
than the population grows.
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Economic Growth Trends
Growth in the UK Economy
In the 100 years from 1910 to 2010, growth in real GDP
per person in the UK averaged 1.6 per cent a year.
But the long-term growth rate has varied.
For example, the growth rate was slower in the first 50
years, at 1.2 per cent a year, than in the second 50 years,
at 2.1 per cent a year.
Growth was fastest during the 1960s and the 1980s.
Figure 15.2 on the next slide illustrates.
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Economic Growth Trends
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Economic Growth Trends
Real GDP Growth in the
World Economy
Figure 15.3(a) shows the
growth in the rich
countries.
Japan grew rapidly in the
1960s, slower in the
1980s, and even slower in
the 1990s.
Growth in Canada and the
US have been similar to
that in Europe Big 4.
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Economic Growth Trends
Figure 15.3(b) shows
the growth of real GDP
per person in group of
poor countries.
The gaps between real
GDP per person in the
US and in these
countries have
widened.
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Why Real GDP Grows
What makes real GDP grow?
The answer is labour productivity growth.
Labour productivity is the quantity of real GDP produced
by an hour of labour.
Labour productivity must grow if real GDP per person is to
grow.
So what makes labour productivity grow?
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Why Real GDP Grows
Labour Productivity Growth
The fundamental precondition for labour productivity
growth is the incentive system created by firms, markets,
property rights and money.
The growth of labour productivity depends on:
 Physical capital growth
 Human capital growth
 Technological advances
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Why Real GDP Grows
Physical Capital Growth
Physical capital growth results from saving and investment
decisions.
The accumulation of new capital increased capital per
worker and increased labour productivity.
Human Capital Growth
Human capital acquired through education, on-the-job
training, and learning-by-doing is the most fundamental
source of economic growth.
Human capital growth is the source of increased labour
productivity and technological advance.
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Why Real GDP Grows
Technological Advances
Technological change – the discovery and the application
of new technologies and new goods – has contributed
immensely to increasing labour productivity.
Labour is many times more productive today than 100
years ago because of technological advances.
To reap the benefits of technological change, capital must
increase.
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Why Real GDP Grows
Policies for Achieving Faster Growth
Growth accounting tell us that to achieve faster economic
growth we must either increase the growth rate of capital
per hour of labour or increase the pace of technological
change.
The main suggestions for achieving these objectives are
Stimulate Saving
Saving finances investment. So higher saving rates might
increase physical capital growth.
Tax incentives might be provided to boost saving.
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Why Real GDP Grows
Improve the Quality of Education
The benefits from education spread beyond the person
being educated, so there is a tendency to under invest in
education.
Encourage International Trade
Free international trade stimulates growth by extracting all
the available gains from specialization and trade.
The fastest growing nations are the ones with the fastest
growing exports and imports.
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