Download Economic growth Ch. 11, p. 293-300

Economic growth
Ch. 11, p. 293-300
What is economic growth? How can it be measured?
How can growth be shown on a PPC model? An ADAS model?
Why does growth matter?
What happens when inflation plays a part in the
economy? Deflation?
Economic growth
• Economic growth is an increase in real GDP, or the
real quantity of goods/services produced over a period of
time (usually a year)
• Expressed as:
– % change in real GDP over period of time
– % change in real GDP per capita over period of time
• Growth in real GDP (rGDP)≠rGDP per capita
– rGDP measures total output of an economy
• Eliminates impact of price changes (as opposed to nominal)
– rGDP per capita measures total output per person
• This is a better indicator of the standard of living of a population
Calculating economic growth
Basic equation/formula:
%ΔrGDP= rGDP2-rGDP x100
rGDP
If the US rGDP in 2011 was $15.24 trillion
and $15.54 trillion in 2012, by how much
did rGDP grow?
Why does growth matter?
• The growth rate can have a serious impact on
the economic performance of a country in the
long run, effecting both rGDP and rGDP per
capita
• Compare: 3 countries with same starting GDP
per capita in 2010 (let’s say, $10000) and three
different growth rates: 7.2%, 2.5%, and -1.4%.
By 2020, how different will the rGDP per capita
be?
Growth and the PPC
• Growth is an increase in
actual output caused by
factors such as reduction
in unemployment,
increases in efficiency,
etc (AS shifters)
• Leads to a movement of
a point inside the PPC to
a point closer to the PPC
– Remember that on the
PPC, we assume that there
is NO unemployment
– Further away from PPC,
greater unemployment of
resources and inefficiency
of production (reductions in
these two can cause
limited growth of actual
output)
Growth and the PPC
•
Outward shifts of PPC:
– Increase in quantity of resources
– Improvements in quality of
resources
•
As prod. poss. increase, economy
must make efforts to keep
unemployment low and reduce
inefficiency to make sure output
continues to grow
•
PPC can also shift inward,
showing decrease in production
possibilities
•
Outward/inward shift does not
have to be parallel; as some
resources may be in greater
supply than others
Investment and economic growth
• Investment: spending on
resources undertaken to
create a future stream of
benefits
• Increases in quantity and
improvement in quality of
physical capital
(investment in physical
capital and new tech) are
important to growth in the
long term
• Investment is crucial to
building capital of any
type
Three types of resources:
• Physical
– Machinery, tools,
infrastructure
• Human
– Labor, skills, abilities,
education, traning, health
care (anything affecting
levels of education/health)
• Natural
– Land/natural resources;
primary commodities,
overall natural
environment/ecosystem(s)
Key points
• Increased quantities of labor does not really help growth
in the long run, but improvements in quality of labor
(from investment in human capital) can have a significant
effect on growth
• Marketable commodity-type natural resources can
contribute to economic growth, but are not essential to it.
Investing in sustainable measures, and in the
quality/quantity of these resources can help with growth
in the long run.
• In order to have long term economic growth, some
consumption must be sacrificed in the short term to
make new investments resulting in new capital for
use in the future.
Growth and the LRAS (AD-AS)
model (p. 300)
Increase in potential output signifies growth in
long-term; decrease signals fall in real output.
Factors that cause long-term growth (LRAS and
AS curve shift right; outward PPC shifts):
• Increases in quantities of FoP
• Improvements in resource quality
• Improvements in technology
• Increase in efficiency
– Institutional change (effect on use of scarce
resources/quantity of output produced…)