Economic Growth

8

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Economic Growth

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

• Percentage rate of growth• Growth lessens burden of scarcity• Arithmetic of growth: Rule of 70

Approximatenumber of yearsrequired to doublereal GDP

=70

annual percentage rateof growth

LO1

Economic Growth• Growth U.S. real GDP 1950-2012

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

• 2% per year

LO1

Modern Economic Growth

• Sustained and ongoing increases in living standards causing dramatic increases in the standard of living in less than a single lifetime.

LO2

Modern Economic Growth

• Time for leisure

• Social change

• Democracy

• Human lifespan doubled

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LO2

Modern Economic Growth

• Began in 1700s with Industrial Revolution

• 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

Modern Economic Growth

Figures are in 2005 dollars

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

LO2

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

Country 1960 2010 1960-2010

United States $ 14,766 $41,365 2.1%United Kingdom 11,257 34,268 2.2France 9,347 31,299 2.4Ireland 6,666 34,877 3.3Japan 5,472 31,477 3.5Singapore 4,149 55,862 5.2Hong Kong 3,849 38,865 4.6South Korea 1,765 26,609 5.4

Modern Economic Growth

LO3

Institutional Structures of Growth

• Strong property rights

• Patents and copyrights

• Efficient financial institutions

• Literacy and widespread education

• Free trade

• Competitive market system

LO3

Determinants of Growth

• Supply factors• Increases in quantity and quality

of natural and human resources • Increases in the supply (or stock)

of capital goods• Improvements in technology

LO3

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

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

U.S. Economic Growth

LO3

Accounting for the Growth of U.S. Real GDP, 1953-2011, Plus Projection from 2011-2022

(Average Annual Percentage Changes)

Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2010, p. 76 Economic Report of the President 2011, p. 52; Bureau of Economic Analysis; Bureau of Labor Statistics.

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

Accounting for Growth

Average Test Scores of Eighth GradeStudents in Math and Science, 2011

Mathematics Science

LO3

Productivity Growth

• Average rate of growth

• 1.5% per year 1973-1995

• 2.4% per year 1995-2012

• Affects real output, real income, and real wages

• Pay higher wages without lowering profit

LO4

Productivity Growth

LO5