Download economic growth

CHAPTER 15
ECONOMIC GROWTH
WHAT IS THIS CHAPTER ALL ABOUT?
The chapter focuses attention on both the short-run and long-run elements of economic growth.
It spotlights a number of issues such as measures of growth, sources of productivity growth and
growth-fostering government policies, with the aim of making students aware that there are
more than one or two ways to increase rates of output.
Great emphasis has been given to the relation between the savings rate, the investment rate and
the growth rate. A discussion of immigration policy as a supply-side growth tool has been
included.
Students are challenged in this chapter to consider the following questions from the perspective
of the United States, and more importantly, from the perspective of the global economy:
1.
How important is economic growth?
2.
How does an economy grow?
3.
What policies promote economic growth?
NEW TO THIS EDITION



New headline on Canadian immigration
Three new Questions for Discussion
Living Econ on “How does exponential growth affect me?
LECTURE LAUNCHERS
Where should you start?
1.
Remind students what the production possibilities curve looks like.
Remember that they have not seen this curve since the first week of class and they
will have only a vague memory of having covered the material before. You can use
the production possibilities curve to demonstrate economic growth.
Chapter 15 – Economic Growth – Page 294
2.
Ask students if economic growth is more important than preserving endangered species
or endangered environments.
This kind of choice is made in all nations. A good example of this choice is the
destruction of the rain forests. The costs of growth may be more than society is
willing to pay.
3.
Ask students why they are investing in an education.
Their answers will mostly center on wanting to get a job. Show the students that
through their education, society is made better off because they become more
productive members of society. Investment in human capital makes workers more
productive contributing to future economic growth.
4.
Ask students what the government can do to promote economic growth.
This question helps you introduce the sections on Sources of Growth and Policy
Levers.
COMMON STUDENT ERRORS
Many students make these common errors. This same list is included in the student study
guide. The first statement in each “common error” below is incorrect. Each incorrect statement
is followed by a corrected version and an explanation.
1. Labor productive increase when more output is produced per dollar of wages. WRONG!
Labor productivity increases when more units of product are produced per unit of labor.
RIGHT!
Productivity changes are not directly related to wage levels. Wage levels reflect a large
number of influences embodied in the demand and supply curves for labor. Productivity,
however, is a physical measure of the relationship between units of product and the
amo0unt of labor needed to produce the product.
2. Zero economic growth treats everyone equally. WRONG!
Zero economic growth generally harms those with low income more than those with high
income. RIGHT!
Zero economic growth in its simplest dimension means the GDP would not grow from year
to year. Income per capita therefore could not grow unless population declined. Yet we
know that U.S. population in growing, although slowly, as a result of new births and
increased longevity, and more recently because of immigration. If GDP were not to grow,
the only way for those at the bottom of the income distribution to have more would be for
someone at the top to take less.
3. Zero economic growth will alleviate the world’s pollution problem. WRONG!
We can only alleviate the pollution problem through economic growth. RIGHT!
Some people mistakenly think that stifling economic growth is a way to cut down on
pollution. It isn’t. The best that a zero economic growth policy could do is cut down on the
growth in pollution. With the same output level and output mix, the rate of pollution would
be the same from year to year. To cut pollution would require cutting GDP – that is, a
Chapter 15 – Economic Growth – Page 295
negative economic growth policy! As the economy grows, we develop new technologies to
use our existing resources more efficiently thus creating less pollution. The economy has
the capability of cleaning up pollution as it grows.
4. The world must run out of resources eventually. WRONG!
The world will learn how to use its resources more efficiently before we run out of resources.
RIGHT!
We’ll stop relying on most presently used, theoretically exhaustible resources long
before they are completely gone. The costs of obtaining them would be too great to
deplete them totally. At some point it will be cheaper to recycle, substitute new
resources, and devise new technologies than to rely on hard-to-get-at supplies of
resources. We won’t run out of everything! For example, as energy costs continue to
increase, the world is beginning to more toward renewable energy sources such as
solar and wind power.
5. A centrally planned economy can easily improve economic growth by shifting toward a
market-based economy. WRONG!
A centrally planned economy cannot easily improve economic growth by shifting toward a
market-based economy. RIGHT!
For a centrally planned economy to improve economic growth by shifting toward a
market-based economy, it is necessary to have an appropriate legal structure in the
economy. As the eastern European economies demonstrated in the 1990s, it is
necessary to have a well-defined property rights system and a legal system that is
devoid of corruption. Without this legal system, any attempt to introduce a marketbased economy will fail as investors loose faith in the system and stop making needed
investments. Without this investment, economic growth stagnates or even contracts as
demonstrated by the Russian economy.
HEADLINES
There are five Headline boxes in this chapter. These provide some information relevant to the
sources-of-growth discussions of this chapter and to questions such as resource availability.
Specifically, they are:
"What Economic Growth Has Done for U.S. Families" (Improved Living
Standards)
This Headline offers a comparison of living standards between 1970 and 1990.
We now live longer, work less and consume more. Examples are provided.
Headline: "O Canada, you’re one tough cookie” (Labor Supply)
The 2001 article describes the Canadian point system for determining
immigration eligibility. Criteria include fluency in English and French, education,
age and work experience.
"Americans Save Little" (Saving Rates) - The U.S. savings rate is far below that of
other countries. This could be slowing investment and economic growth. On
average, in 2000, Americans spent 100 cents out of every dollar of disposable
income.
Chapter 15 – Economic Growth – Page 296
“Economic Freedom and Per Capita Income” (Institutional Framework)
This headline compares economic freedom to per capita income. A nation’s
framework affects its economic growth. Nations with more open and less
regulated economies grow faster.
“Keeping up with the Patels and the Wangs" (Population Growth)
The United States will be the only developed country on the list of fastest-growing
nations. Continuing population growth implies that total output must also grow
to maintain existing living standards. Still faster output growth is needed to raise
living standards.
ANNOTATED CONTENTS IN DETAIL
I.
II.
The Nature of Growth
A.
Short-Run Changes in Capacity Use.
1.
Production possibilities
Definition: Production possibilities - The alternative combinations
of final goods and services that could be produced in a
given time period with all available resources and
technology.
2.
By using all our available resources and our best expertise, we can
produce any combination of goods on the possibilities curve.
B.
Long-Run Changes in Capacity
1.
To achieve large and lasting increases in output production we must push
our production possibilities outwards.
2.
Economic growth
Definition: Economic growth - An increase in output (real GDP); an
expansion of production possibilities.
3.
Two types of growth (Figure 15.1)
a.
The short run - increased capacity utilization
b.
The long run - expanded capacity
4.
Aggregate Supply focus (Figure 15.2) - Economic growth possible only if
AS curve shifts right.
C.
Nominal vs. Real GDP
1.
Nominal GDP
Definition: Nominal GDP - Total value of goods and services
produced within a nation's borders, measured in current prices.
2.
Real GDP
Definition: Real GDP – Inflation-adjusted value of GDP; the value of
output measured in constant prices.
3.
Economic growth refers to increases in real GDP.
Growth Indexes
A.
The GDP Growth Rate (Figure 15.3)
1.
Growth rate
Definition: Growth Rate – Percentage change in real GDP from one
period to another.
2.
Formula:
Chapter 15 – Economic Growth – Page 297
Growth Rate 
3.
4.
III.
change in real GDP
base period GDP
The policy challenge is to foster faster, steadier GDP growth.
The exponential process.
a.
Even one year of "low" growth implies lost output.
b.
Economic growth is a continuing process.
c.
Little increases compound exponentially.
B.
GDP per Capita: A Measure of Living Standards
1.
GDP per capita
Definition: GDP per capita – The total GDP divided by total
population; average GDP.
2.
Growth in GDP per capita is attained only when growth of output
exceeds population growth.
3.
U.S. GDP per capita more than doubled since John F. Kennedy
was President.
4.
The Rule of 72 (Table 15.1) - Seventy-two divided by the growth
rate equals the number of years it takes to double.
5.
Headline: "What Economic Growth Has Done for U.S.
Families." (Improved living standards) - This Headline
offers a comparison of living standards between 1970 and 1990.
We now live longer, work less, and consume more. Examples are
provided.
C.
GDP per worker: A Measure of Productivity
1.
Labor force
Definition: Labor force - All persons over age sixteen who are either
working for pay or actively seeking paid employment.
2.
Employment rate
Definition: Employment Rate – The proportion of the adult
population that is employed.
3.
Productivity
Definition: Productivity – Output per unit of input, e.g., output per
labor hour.
4.
Productivity gains (Figure 15.5) – Most economies remained stagnant
until about 1820. Since then, most growth has occurred in the west.
5.
The average worker today produces nearly twice as much as his/her
parents.
Sources of Productivity Growth
A.
The Sources of Productivity Gains include:
1.
Higher skills.
2.
More capital.
3.
Improved management.
4.
Technological Advance.
B.
Labor Quality
1.
Nearly 30 percent of the work force has completed four years of college
education.
2.
As education and training levels rise, so does productivity.
Chapter 15 – Economic Growth – Page 298
C.
Capital Investment
1.
Investment
Definition: Investment – Expenditures on (production of) new plant
and equipment (capital) in a given time period, plus
changes in business inventories.
2.
Capital investment is a prime determinant of productivity and growth
(Table 15.2).
D.
Management
1.
Entrepreneurship and the quality of continuing management are major
determinants of economic growth.
2.
There exists conflict between short-run profits and long-term productivity
gains.
3.
Managers must also learn to motivate employees to produce their
maximum potential.
E.
Research and Development
1.
Research and development lead to new products and cheaper ways of
producing them.
2.
Research and development also lead to capital investment. As you replace
existing equipment, you also are upgrading your productive capabilities
by installing equipment with more capabilities.
IV. Policy Levers –
Government policies can have a major impact on whether, and
how far, the aggregate supply curve shifts.
A.
Education and Training - Policies, which support education and training,
contribute directly to growth and productivity by improving the quality of labor.
B.
Immigration Policy
1.
Direct contributor to an outward shift of the PPC.
2.
Recent immigrants, on average, have had lower educational levels.
C.
Headline: "O Canada, you’re one tough cookie” (Labor Supply)
The 2001 article describes the Canadian point system for determining
immigration eligibility. Criteria include fluency in English and French, education,
age and work experience.
D.
Investment Incentives - Tax policy is not only a staple of short-term
stabilization policy but a determinant of long-run growth as well.
E.
Savings Incentives
1.
Saving
Definition: Saving – Income minus consumption: that part of
disposable income not spent.
2.
Supply-side economists favor tax incentives encouraging saving as well as
greater tax incentives for investment.
Chapter 15 – Economic Growth – Page 299
V.
F.
Headline: "Americans Save Little" (Saving Rates) - The U.S. savings rate
is far below that of other countries. This could be slowing investment and
economic growth. On average, in 2000, Americans spent 100 cents out of every
dollar of disposable income.
G.
Government Finances
1.
Crowding out
Definition: Crowding Out—A reduction in private-sector borrowing
(and spending) caused by increased government
borrowing.
2.
Crowding in
Definition: Crowding In – An increase in private-sector borrowing
(and spending) caused by decreased government borrowing.
3.
Fiscal and monetary policies must be evaluated in terms of the impact not
only on short-run aggregate demand but also on long-run aggregate
supply.
H.
Deregulation - Another Way to Stimulate Growth.
1.
Factor markets
a.
Minimum wage laws - goal is to ensure workers a decent standard
of living.
i.
Prohibits employers from using lower paid workers and
thus limits employers ability to higher additional workers.
ii.
Limits job opportunities for immigrants, teenagers and
low-skill workers.
iii.
Without this constraint more workers would find jobs, gain
experience and shift AS rightward.
b.
OSHA standards
c.
More people would be hired without regulation.
2.
Product markets
a.
Transportation costs
b.
Food and drug standards
c.
Regulation causes restricted supply.
d.
The basic contention of supply-side economists is that regulatory
costs are too high.
I.
Economic Freedom
1.
Government also establishes and enforces property rights, legal rights,
and political rights.
2.
One of the greatest obstacles to post-communist growth in Russia was the
absence of legal protection.
3.
“Economic Freedom and Per Capita Income”
This headline compares economic freedom to per capita income. A
nation’s framework affects its economic growth. Nations with more open
and less regulated economies grow faster.
Policy Perspectives
A.
Is more growth desirable? More growth can lead to:
1.
Congestion.
2.
Air pollution.
3.
Depleted natural resources.
Chapter 15 – Economic Growth – Page 300
4.
B.
A debate that usually centers around the mix of goods and services being
provided rather than the quantity of output.
Headline: “Keeping up with the Patels and the Wangs" (Population
Growth)
The United States will be the only developed country on the list of fastest-growing
nations. Continuing population growth implies that total output must also grow
to maintain existing living standards. Still faster output growth is needed to raise
living standards.
IN-CLASS DEBATE, EXTENDING THE DEBATE, AND
DEBATE PROJECTS
In-class Debate
Fiscal policy: Long run impetus or drag?
Does an active fiscal policy help or hinder long run growth in the economy? The textbook
presents arguments that can be used to support both sides in this debate. How do they compare?
List reasons why an active fiscal policy helps the long run growth of the economy.
List reasons why an active fiscal policy hinders the long run growth of the economy.
Should the US use fiscal policy to encourage long run growth of the economy?
Teaching note
Student answers:
List in favor will include
 education and training to improve labor quality;
 research and development;
 regulations have benefits.
List against will include:
 lower capital gains tax helps investment;
 federal deficit crowds out private investment;
 deregulation prompts productivity;
 saving incentives increase investment.
Use a cooperative controversy to focus the debate. Format: Organize students into groups of
two. (Use instructor assignment or random assignment so that friends don’t work together.)
One half of the groups take the pro side; the other half take the con side. Each pair lists the
strongest three arguments for their position. Then pairs combine into groups of four with one
pair on each side of the debate. One pair reads their reasons while the other side listens. Then
Chapter 15 – Economic Growth – Page 301
reverse so that the other pair reads their reasons. Group of four selects strongest argument on
each side and, if appropriate, reaches consensus on final position.
Extending the Debate
Should US immigration be limited?
Using the sites below identify the single most critical issue in the immigration debate for the US
economy? Why is this issue more important than any other?
Describe the best policy to deal with this issue? (Your policy does not need to be the same as the
policies described at the web sites. It may be different or a combination of policies they
recommend.)
The first two links are to articles by immigration expert Steven Camarota at the Center for
Immigration Studies. He is concerned with the large number of low-skill immigrants coming
into the US.
http://www.cis.org/articles/2001/sac9-3-01.html
http://www.cis.org/articles/1999/sac2-2-99.html
This article by Douglas Massey from The American Prospect, expresses concern at our vigorous
efforts to restrict immigration from Mexico.
http://www.prospect.org/print/V14/7/massey-d.html
This statement from The National Immigration Forum summarizes the benefits to the US from
immigrants.
http://www.immigrationforum.org/pubs/articles/economy2002.htm
Teaching notes
Use information gathered by students out of class to conduct an in-class cooperative
controversy. Or, use the information for individually-written essays on the topic.
Format: Organize students into groups of two. (Use instructor assignment or random
assignment so that friends don’t work together.) One half of the groups take the pro side; the
other half takes the con side. Each pair lists the strongest three arguments for their position.
Then pairs combine into groups of four with one pair on each side of the debate. One pair reads
their reasons while the other side listens. Then reverse so that the other pair reads their reasons.
Group of four selects strongest argument on each side and, if appropriate, reaches consensus on
final position.
Debate project
For related debate material see “Economic Growth” in Chapter 1.
Chapter 15 – Economic Growth – Page 302
ANSWERS TO QUESTIONS FOR DISCUSSION, WEB
ACTIVITIES AND PROBLEMS
QUESTIONS FOR DISCUSSION
1.
In what specific ways (if any) does a college education increase a worker's productivity?
Specific ways depend on the type of job and the student’s major. For example, if
you study math and have a job that utilizes math skills, then the education
increased that person’s productivity.
A more general answer is that a college education helps people think better.
Much of what is learned in college is how to examine available information and
make a decision based upon that information. For example, in economics
students learn about marginal costs and marginal benefits and how this
information can be used to make better decisions.
2.
Why don't we consume all of our current output instead of sacrificing some present
consumption for investment?
If saving were zero, net investment would also be zero; future economic growth
would be constrained. It is necessary to use some of our current production to
replace worn out capital as well as to invest in new plant and equipment or
economic growth would stagnate and our standard of living would begin to
decline.
3.
If 1866, Stanley Jevons predicted that economic growth would come to a halt when
England ran out of coal, a doomsday he reckoned would occur in the mid-1970’s. How
did we manage to avert that projection? Will an oil shortage cripple future growth?
In 1866, Jevons did not envision the technological developments that have
allowed us to discover more efficient methods of finding and extracting not only
coal, but more importantly alternative forms of energy, such as petroleum, thus
reducing the need for coal. In addition, technological developments have helped
us develop wind and solar power and more efficient machinery that uses less
power. In the last few years, there has been talk – and some action – about
moving to a “hydrogen economy.”
If we don’t do anything, an oil shortage will cripple future growth, but we are
already planning the transition to alternatives. As any resource increases in
price, there is a market-based incentive to develop and switch to alternative
resources that are more cost effective.
4.
Fertility rates in many developed nations, e.g., France, have dropped so low that they are
approaching zero population growth. How will this affect economic growth? The
standard of living?
It is possible to have both positive economic growth and a rising standard of
living with zero population growth. Efficiencies of production can continue to
move out the production-possibilities frontier in the absence of increases in the
labor force. If productivity rises at historical rates while the population growth
is zero, standards of living will rise even faster than in the past. Furthermore, if
population growth is zero, the need for growth in output diminishes. Note that
Chapter 15 – Economic Growth – Page 303
the question is only referring to “natural” population growth based on the
fertility rate. Countries may also grow through net immigration.
5.
Suppose that economic growth could only be achieved by increasing inequality (e.g., via
tax incentives for investment). Would economic growth still be desirable?
The desirability of such economic growth is open to considerable debate. One
position is that the growth resulting from the increased inequality of income
distribution would be insufficient to offset the impact of the increased
inequality. In other words, although total output might increase, the net effect
might be that the rich get richer and the poor get poorer. Another position is
that the increased growth would more than offset the initial negative impact of
increased inequality. Everyone would benefit although some would benefit
more than others. Whether this outcome is desirable depends on your social
views of income inequality.
6.
Is limitless growth really possible? What forces do you think will be most important in
slowing or halting economic growth?
No, although growth is a relative term. What is most important to consider for
this question is whether unlimited growth is possible in a given time period.
Although new technologies, production techniques, and population growth will
continue to allow for economic growth, there exist limits at any point in time to
how much growth an economy can experience. If we ever do fall behind in
developing new technology and in devising new production techniques, then
there is a possibility that the rate of growth will be slowed or even reduced to
zero.
7.
Notice in the Headline on p. 338 how the time spent working on the job and at home has
declined. How are these changes indicative of economic growth?
Time spent on the job has fallen from 37.1 hours to 34.5 hours while working at
home hours declined from 3.9 hours to 3.5 hours. During this same period
output increased, consumption increased, and household net worth doubled
indicating significant economic growth. So we are getting more for less due to
increases in productivity.
8.
How would the following factors affect a nation’s growth potential?
a.
legal protection of private property
b.
high tax rates
c.
judicial corruption
d.
government price controls
e.
free trade
a.
Legal protection of private property through the establishment of well-defined
property rights allows all benefits of ownership to accrue to the owner and all
costs associated with ownership to be paid by the owner. As a result, businesses
are willing to invest in factories and technology, consumers are willing to
purchase cars and houses, with each knowing their ownership is protected. If
this legal protection did not exists, businesses would not build new factories,
invest in new technology or develop new products fearing their investments
would not return a profit as others steal their investments. When this
investment stops, economic growth not only stops but contracts as is evident in
the Russian economy during the 1990s.
Chapter 15 – Economic Growth – Page 304
9.
b.
High tax rates reduce the profit potential for investments. As a result, only
those investment projects that are profitable enough to pay the high taxes occur
and, as a result, economic growth is slowed.
c.
When judicial corruption exists, all of the issues associated with the lack of legal
protection discussed in the answer to part ‘a’ occur. Businesses fear their
investments might be stolen. If the judicial system is corrupt, there exists no
viable legal recourse and, as a result, the total quantity of investment is reduced
and economic growth declines.
d.
Government price controls are generally established to prevent the price levels
from rising to the market equilibrium level. This lower price decreases the
profits earned in this market and, as a result, less investment occurs and
economic growth declines.
e.
Free trade allows resources to migrate, over time, to the area of greatest
returns (profits). A nation without free trade has a tendency to use its resources
inefficiently when compared to a nation with free trade. Although there is
generally a painful adjustment period to free trade, free trade generally results
in a nations resources being used more efficiently and this results in increased
economic growth.
Should the United States adopt an immigration policy like Canada’s (see Headline, p.
343) or continue to give preference to family members?
From a purely economic, growth-oriented perspective, Canada’s immigration
system makes a lot of sense. However, immigration policies depend on many
factors and while the economy may be one of them, it is not the only one.
WEB ACTIVITIES
1. Log on to www.whitehouse.gov/fsbr/output.html. What is the U.S. economy’s most recent
growth rate?
The answer to this question will depend upon what time period you access this information.
2. Log on to www.whitehouse.gov/fsbr/output.html. What has been the trend in growth in the
U.S. during the last 3 years?
The answer to this question will depend upon what time period you access this information.
3. Log on to www.heritage.org/index. Click on "Simple Search."
a.
b.
How does economic freedom in the U.S. compare to Hong Kong? Japan? China?
How would you expect future economic growth in the U.S. to compare to these
nations? Explain!
a.
According to the Heritage Foundation, the U.S.(#6) enjoys greater economic
freedom than do most other counties, except for Hong Kong.
Chapter 15 – Economic Growth – Page 305
b.
Because of this economic freedom, the U.S. is expected to experience more
economic growth than most other nations. Part of the index of economic freedom
includes the level of government intervention in the market place. In general,
markets respond to consumer needs better than do governments. Economic
decisions based on market signals also tend to lead to greater growth, over time,
than do economic decisions based upon government mandates.
PROBLEMS
1.
China’s output grew at an amazing rate of 10 percent per year in the 1990s. At that rate
how long will it take for China's GDP to double? (see Table 15.1). With its population increasing
at 0.6 percent per year, how long will it take for per capita GDP to double?
At 10 percent a year, China’s GDP would double in 7.2 years (72/10). With population
growing at 0.6 percent a year, the growth rate per capita is the growth rate of GDP
subtracted by the growth rate of the population, in this case 10 - .06 = 9.4 percent. Using
the Rule of 72 (72/9.4), it would take 7.7 years for China’s GDP per capita to double.
2.
If real GDP is growing at 3 percent a year, how long will it take for:
a.
Real GDP to double?
b.
Real GDP per capita to double if the population is increasing each year by
i.
0 percent?
ii.
iii.
1 percent?
2 percent?
With real GDP growing at 3 percent a year:
(a)
Real GDP will double in 24 years (check Table 15.1 on page 344 or use
"rule of 72" so that 72/3 = 24)
(b) Real GDP per capita will double in
i. 24 years. (72/3) Note that with no population growth, the growth rate
per capita is the same as the growth rate of Real GDP.
ii. 36 years. (3 - 1 = 2; 72/2 = 36)
iii. 72 years. (3 - 2 = 1; 72/1 = 72)
3.
In 2000, approximately 64 percent of the adult population (220 million) was employed.
If the employment rate increased to 65 percent:
a.
How many more people would be working?
b.
By how much would output increase if per worker GDP is $70,000?
a.
If there are 220 million adults in the U.S., and 64% of these were working,
then 140.8 million adults were working. If the employment rate increased
to 65 percent, then there would be 143 million adults would be working,
an increase of 2.2 million people working.
Chapter 15 – Economic Growth – Page 306
b.
4.
According to the data in Figure 15.4, how fast did world GDP per capita grow from
a.
1000 to 1500
b.
1500 to 1820
c.
1820 to 1995
a.
b.
c.
5.
These 2.2 million people, each producing an average of $70,000, would
result in an increase in GDP of $154 billion.
$420 - $545 or a 29.8 percent growth rate.
$545 - $675 or a 23.9 percent growth rate.
$675 - $5,188 or a 668.6 percent growth rate.
Suppose that every additional 5 percentage points in the investment rate (I/GDP) boosts
economic growth by 1 percentage point. Assume also that all investment must be
financed with consumer saving. The economy is now characterized by:
GDP:
$6 trillion
Consumption:
$5 trillion.
Saving:
$1 trillion.
Investment:
$1 trillion.
If the goal is to raise the growth rate by 1 percent
a.
By how much must investment increase?
b.
c.
By how much must consumption decline for this to occur?
Are consumers better or worse off as a result?
If the goal is to raise the growth rate by 1 percent:
(a)
The investment rate must rise by 5 percentage points from 16.7% ($1 trillion / $6
trillion) to 21.7%. To achieve this with current GDP, investment must increase to
approximately $1,302 billion or $302 billion more investment.
(b)
Consumption must decline by the same $302 billion to provide for the increase in
investment financed by savings.
(c)
Consumers spend less in the initial year, but they will benefit from having a
larger GDP in subsequent years.
Chapter 15 – Economic Growth – Page 307
MEDIA EXERCISE
Chapter 15
Economic Growth
Name: ___________________
Section: __________________
Grade: ___________________
Find an article that illustrates an event that would alter productivity. The article may contain
information about a shift that has already occurred, is presently occurring, or may occur in the
future. Use the article you have found to fulfill the following instructions and questions:
1. Mount a copy (do not cut up newspapers or magazines) of the article on a letter-sized page
or print an article from an Internet news agency such as www.cnn.com, www.msnbc.com,
www.abc.com, www.nytimes.com, etc.
2. Underline the one statement (not more than a sentence) that reports an event that alters
productivity and causes a shift in aggregate demand or aggregate supply.
3. Who is affected first by the policy change? Use an arrow to indicate in the article where the
article states who is affected first by the shift, the buyers or the sellers of goods and services.
4. Find evidence of an actual or expected change in quantity, cost, productivity, or price due to
the event. Circle the one phrase (not more than a sentence) that indicates this change.
5. Below your mounted article write one of the following shifts of aggregate demand or supply
that is illustrated by the article:
 Aggregate supply curve shift to the left.
 Aggregate supply curve shift to the right.
 Aggregate demand curve shift to the left.
 Aggregate demand curve shift to the right.
(Hint: Be sure your choice is consistent with your other answers. Make sure you focus
on just one shift.)
6. In the remaining space below your article, indicate the source (name of newspaper,
magazine or web site), title (newspaper headline, magazine article, or web article title), date,
and page for the article you have chosen. Use this format:
Source: ___________________ Date: ______________ Page: ____________
Title: __________________________________________________________
If this information also appears in the article itself, circle each item.
7.
Neatness counts.
Chapter 15 – Economic Growth – Page 308
Professor's Note
Learning Objective for Media Exercise
To indicate to the students where issues involving productivity can be found in the media.
Suggestions for Correcting Media Exercise
1. Check that the students recognize that productivity changes involve the supply curve and
that the supply curve should shift to the right for increased productivity.
2. Be sure that the underlined passage actually causes a productivity change.
3. Examine the consistency between the choice of supply curve shift (written below the article)
and the circled passages on the product, price, productivity, or cost change.
4. Students who show aggregate demand changing may have indicated that their event first
occurs with the seller (where they should have placed an arrow). If so, here is another
opportunity to remind students that aggregate demand involves buyers, not sellers.
Likely Student Mistakes and Lecture Opportunities
1. The students may still confuse the direction that the supply curve shifts as a result of
increased productivity.
2. Some of the articles are likely to involve productivity changes in other countries in
comparison with changes in the United States. Such articles provide an excellent
opportunity to emphasize the importance of relative productivity changes for the health of
the economy.
SUPPLEMENTARY RESOURCES
Moore, Stephen: "So much for 'scarce resources,'" The Public Interest, Winter 1992.
Describes the great Ehrlich-Simon bet about whether or not the cost of five metals
would rise over a decade, and Simon (the economist) won. He then describes
(easy reading for students) how wrong the gloom and doom predictions of the
1970s were.
“Symposium: Computers and Productivity,” The Journal of Economic Perspectives, Fall
2000, pp. 3 – 74. Accessible discussion of the role of computers in the ‘new
economy.’
Stiglitz, Joseph, Globalization and Its Discontents WW Norton, 2002. For discussion of
the book see Basu, Kaushik “Globalization and the Politics of International
Finance” Journal of Economic Literature September 2003.
Chapter 15 – Economic Growth – Page 309