Economic Growth

25

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Economic Growth

• Increase in real GDP or real GDP per capita over some time period

• Percentage rate of growth• Growth as a goal• Arithmetic of growth: Rule of 70

Approximatenumber of yearsrequired to doublereal GDP

=70

annual percentage rateof growth

LO1 25-2

Economic Growth

• Growth in U.S. real GDP 1950-2009• Increased 6 fold

• 3.2% per year • Growth in U.S. real GDP per capita

• Increased more than 3 fold• 2% per year

• Qualifications • Improved products and services• Added leisure• Other impacts

LO1 25-3

Economic Growth

(1)Year

(2)Real GDP, Billions of 2

2005$

(3)Population,

Millions

(4)Real GDP,Per Capita,

2005$(2) ÷ (3)

1950 $ 2006 152 $12,197

1960 2831 181 15,640

1970 4270 205 20,829

1980 5839 228 25,610

1990 8034 250 32,136

2000 11,226 282 39,809

2009 12,987 307 42,303

Source: Bureau of Economic Analysis, http://www.bea.gov and U.S. Census Bureau, http://www.census.gov

Real GDP and Real GDP per Capita

LO1 25-4

Modern Economic Growth

• Began with the Industrial Revolution in late 1700s

• Ongoing increases in living standards

• Time for leisure

• Social change

• Democracy

• Human lifespan doubled

LO2 25-5

Modern Economic Growth

• Began in Britain

• Has spread slowly

• Starting date main cause of worldwide differences in living standards

• Catching up is possible

• Leader countries invent technology

• Follower countries adopt technology

• Can grow faster

LO2 25-6

Modern Economic Growth

Real GDP Real GDP Average annual per capita, per capita, growth rate,

Country 1960 2007 1960-2007

United States $ 14,766 $42,887 2.3%United Kingdom 11,257 32,181 2.3France 9,347 29,663 2.5Ireland 6,666 41,625 4.0Japan 5,473 30,585 3.7Singapore 4,149 44,619 5.2Hong Kong 3,849 43,121 5.3South Korea 1,765 23,850 5.7

Figures are in 2005 dollars

Source: Penn World Table version 6.3, pwt.econ.upenn.edu

LO2 25-7

Modern Economic Growth

LO3 25-8

Institutional Structures of Growth

• Strong property rights

• Patents and copyrights

• Efficient financial institutions

• Literacy and widespread education

• Free trade

• Competitive market system

LO3 25-9

Determinants of Growth

• Supply factors

• Increases in quantity and quality of natural resources

• Increases in quality and quantity of human resources

• Increases in the supply (or stock) of capital goods

• Improvements in technology

LO3 25-10

Determinants of Growth

• Demand factor

• Households, businesses, and government must purchase the economy’s expanding output

• Efficiency factor

• Must achieve economic efficiency and full employment

LO3 25-11

a

EconomicGrowth

b

D

Production Possibilities

LO3

B

A

C

Consumer Goods

Ca

pit

al G

oo

ds

c

From Chapter 1:

25-12

Labor and Productivity

• Size of employed labor force

• Average hours of work

LaborInputs(hours ofwork)

• Technological advance

• Quantity of capital

• Education and training

• Allocative efficiency

• Other

LaborProductivity(average output per hour)

RealGDP

Real GDP = hours of work x labor productivity

x =

LO3 25-13

U.S. Economic Growth

Item

1953 Q2

To 1973 Q4

1973 Q4

To 1995 Q4

1995 Q4

To 2001 Q1

2001 Q1

To 2007 Q3

Projected

2009 Q1

To 2020 Q4

Increase in real GDP 3.6 2.8 3.8 2.6 2.5

Increase in quantity of labor 1.1 1.3 1.4 -0.1 0.2

Increase in labor productivity 2.5 1.5 2.4 2.7 2.3

Accounting for the Growth of U.S. Real GDP, 1953-2007, Plus Projection from

2009-2020

(Average Percentage Changes)

Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2010, p. 76

LO3 25-14

Accounting for Growth

• Factors affecting productivity growth

• Technological advance (40%)

• Quantity of capital (30%)

• Education and training (15%)

• Economies of scale and resource allocation (15%)

LO3 25-15

Accounting for Growth

Average Test Scores of Eighth GradeStudents in Math and Science, 2007

Mathematics Science

LO3 25-16

Productivity Growth

• Average rate of growth

• 1.5% per year 1973-1995

• 2.8% per year 1995-2009

• Affects real output, real income, and real wages

• Pay higher wages without lowering profit

LO4 25-17

Productivity Growth

• Microchip/information technology

• New firms and increasing returns

• Sources of increasing returns

• More specialized inputs

• Spreading of development costs

• Simultaneous consumption

• Network effects

• Learning by doing

• Global competitionLO4 25-18

Productivity Growth

LO5 25-19

Economic Growth

• Is economic growth desirable and sustainable?

• The antigrowth view

• Environmental and resource issues

• In defense of economic growth

• Higher standard of living

• Human imagination can solve environmental and resource issues

LO5 25-20

Economic Growth

• Growth is the path to greater material abundance

• Results in higher standards of living

• Increases leisure time

• Allows for the expansion and application of human knowledge

LO5 25-21

Global Perspective

LO5 25-22

Economic Growth in China

• Growth averages past 25 years:• 9% annual growth output

• 8% annual growth output per capita

• Labor more productive

• More international trade

• Transition to market economy

• Joined WTO 2001

• Financial system remains weak

• Income inequality across areasLO5 25-23