Download Economic Growth

Economic Growth
I.
Economic Growth an Introduction
A. Two definitions of economics growth are given.
1. The increase in real GDP, which occurs over a period of time.
2. The increase in real GDP per capita, which occurs over time. This definition is
superior if comparison of living standards is desired. For example, China’s 2003
GDP was $1410 billion compared to Denmark’s $212 billion, but per capita
GDP’s were $1110 and $33,750 respectively.
3. Growth in real GDP does not guarantee growth in real GDP per capita. If the
growth in population exceeds the growth in real GDP, real GDP per capita will
fall.
B. Growth is an important economic goal because it means more material abundance
and ability to meet the economizing problem. Growth lessens the burden of scarcity
C. The arithmetic of growth is impressive. Using the “rule of 70,” a growth rate of 2
percent annually would take 35 years for GDP to double, but a growth rate of 4
percent annually would only take about 18 years for GDP to double. (The “rule of
70” uses the absolute value of a rate of change, divides it into 70, and the result is the
number of years it takes the underlying quantity to double.)
D. Main sources of growth are increasing inputs or increasing productivity of existing
inputs.
1. About one-third of U.S. growth comes from more inputs.
2. About two-thirds comes from increased productivity.
E. Growth Record of the United States is impressive.
1. Real GDP has increased over six fold since 1950, and real per capita GDP has
risen over threefold.
2. Rate of growth record shows that real GDP has grown about 3.4 percent per year
since 1950 and real GDP per capita has grown about 2.1 percent per year. But
the arithmetic needs to be qualified.
a. Growth doesn’t measure quality improvements.
b. Growth doesn’t measure increased leisure time.
c. Growth doesn’t take into account adverse effects on environment or
human security.
1
d. International comparisons are useful in evaluating U.S. performance. For
example, Japan grew more than twice as fast as U.S. until the 1990s when the
U.S. far surpassed Japan.. There is also some tendency for growth rates to
move together, reflecting the interdependence of the global economy.
II.
Modern Economic Growth
A. Modern economic growth is characterized by sustained ongoing increases in living
standards that can cause dramatic increases in the standard of living within a
generation.
B. Economic historians informally date the start of the Industrial Revolution to the year
1776, when Scottish inventor James Watt perfected a powerful and efficient steam
engine.
C. The Uneven Distribution of Growth
1. Modern economic growth has spread only slowly from its British birthplace.
It first advanced to France, Germany, and other parts of Western Europe in
the early 1800’s before spreading to the Untied States, Canada, and Australia
by the mid 1800’s.
2. The different starting dates for modern economic growth in various parts of
the world are the main cause of the vast differences in per capita GDP levels
seen today.
3. Figure 25.1 shows what economists have called the great divergence in
income levels around the world as a result of different rates of, and starting
dates for, modern economic growth.
D. Catching Up is Possible
1. Countries that began modern economic growth more recently are not doomed
to be permanently poorer than the countries that began modern economic
growth at an earlier date.
2. The poorer ‘follower countries’ can grow much faster because they can
simply adopt existing technologies from rich ‘leader countries’.
3. Table 25.2 shows both how the growth rates of leader countries are
constrained by the rate technological progress as well as how certain follower
countries have been able to catch up by adopting more advanced
technologies and growing rapidly.
III.
Institutional Structures That Promote Growth
Economic historians have identified several institutional features that promote and sustain
modern economic growth
.
1. Strong Property Rights
2
2.
3.
4.
5.
6.
IV.
Patents and copyrights
Efficient financial institutions
Literacy and widespread education
Free trade
A competitive market system
Ingredients of Growth
A. Four supply factors relate to the ability to grow.
1. The quantity and quality of natural resources,
2. The quantity and quality of human resources,
3. The supply or stock of capital goods, and
4. Technology.
B. Two demand and efficiency factors are also related to growth.
1. Aggregate demand must increase for production to expand.
2. Full employment of resources and both productive and allocative efficiency are
necessary to get the maximum amount of production possible.
V.
VI.
Production Possibilities Analysis
Growth can be illustrated with a production possibilities curve, where growth is indicated
as an outward shift of the curve.
1. Aggregate demand must increase to sustain full employment at each new level of
production possible.
2. Additional resources that shift the curve outward must be employed efficiently to
make the maximum possible contribution to domestic output.
3. For the economy to achieve the maximum increase in value, the optimal
combination of goods must be achieved (allocative efficiency).
4.
Accounting for growth is an attempt to quantify factors contributing to economic
growth.
A. More labor input is one source of growth. Labor force has grown by 1.7 million
workers per year for the past 52 years and accounts for about one-third of total
economic growth.
B. The growth of labor productivity contributed only about half of the growth from
1973-1993, but was responsible for all it from 1995-2004, and is expected to account
for about three-fourths of the growth between 2005 and 2011.
C. Women, the Labor Force, and Economic Growth
3
1. The percentage of women working in the paid labor force has risen from 40
percent in 1965 to 56 percent in 2006.
2. Women’s productivity has increased with greater investments in human capital.
Productivity increases have raised women’s wages and increased the opportunity
cost of staying home.
3. Reduced birthrates, growth in industries typically attracting women workers,
urban migration, increased availability of part-time jobs, and antidiscrimination
laws have all increased labor market access for women.
D. Technological advance, the most important factor in productivity growth, accounts
for 40 percent of productivity growth.
E. Increases in quantity of capital are estimated to explain about 30 percent of
productivity growth.
F. Education and training improve the quality of labor, and account for about 15 percent
of productivity growth.
G. Improved resource allocation and economies of scale also contribute to growth and
explain about 15% of total productivity growth.
1. Economies of scale occur as the size of markets and firms that serve them have
grown.
2. Improved resource allocation has occurred as discrimination disappears and labor
moves where it is most productive, and as tariffs and other trade barriers are
lowered.
4