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Ch 17-ECONOMIC GROWTH 2 POSSIBLE DEFINITIONS: 1-INCREASE IN REAL GDP 2-INCREASE IN REAL GDP PER CAPITA 6 INGREDIENTS OF GROWTH 4 SUPPLY FACTORS 1-quantity & quality of natural resources 2-quantity & quality of human resources 3-supply of capital goods 4-technology 2 DEMAND FACTORS 1-AD must increase for production to expand 2-fully employment of resources with productive & allocative efficiency PRODUCTION POSSIBILITIES ANALYSIS Economic Growth Capital Goods C A b a 0 B D Consumer Goods GROWTH RECORD OF US INCREASED 6X SINCE 1950 BUT GROWTH DOESN’T MEASURE: 1-QUALITY IMPROVEMENTS 2-INCREASED LEISURE TIME 3-ADVERSE EFFECTS ON ENVIRONMENT SUPPLY DETERMINANTS OF REAL OUTPUT •Size of employed labor force •Average hours of work Labor Inputs (Hours of Work) X •Technological advance Labor •Quantity of capital Productivity •Education and (Average training Output •Allocative Per Hour) efficiency •Other = REAL GDP HOW TO ACCOUNT FOR GROWTH More labor input---accounts for 1/3 of total economic growth Technological advances—account for 26% of US growth since 1929 Increases of capital—accounts for 18% Education & training—improves quality of labor 12% of growth from improved resource allocation & economies of scale GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C Price Level Capital Goods A B D Consumer Goods Q1 Q2 Real GDP ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 Price Level AS1 P2 P1 AD2 AD1 o Q1 Real GDP Q2 OTHER ITEMS THAT HELP ECONOMIC GROWTH Social/political/cultural environment that are “growth” friendly Respect for material success Property rights & legal system Market system rewards growth NEW ECONOMY BASED ON PRODUCTIVITY ACCELERATION Improved standard of living based on labor productivity 1-microchip technology 2-new firms & increasing profits Reasons for increasing returns(profits) A-more specialized inputs B-increased consumption C-spread R & D costs over large output Keep MC low D-networking make info goods more valuable PRODUCTIVITY ACCELERATION PART 2 3-Global competition encourages efficiency 4-Faster growth w/o inflation possible with higher productivity 5-NRU decreasing from 6% IS GROWTH DESIRABLE & SUSTAINABLE? ANTI-GROWTH GROWTH CAUSES: ENVIRONMENTAL PROBLEMS HIGH STRESS DEAD-END JOBS; BURNOUT PRO-GROWTH GROWTH CAUSES IMPROVEMENTS IN: STANDARD OF LIVING WORKING CONDITIONS LEISURE GETTING RID OF POVERTY MORE OPTIONS TO DEAL WITH ENVIRONMENTAL ISSUES *ONLY LIMIT TO GROWTH IS HUMAN IMAGINATION