Chapter 8 Economic Growth Mc GrawHillIrwin Copyright 2015

Chapter 8 Economic Growth Mc. Graw-Hill/Irwin Copyright © 2015 by Mc. Graw-Hill Education. 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 Approximate number of years required to double real GDP LO 1 = 70 annual percentage rate of growth

Economic Growth LO 1 • Growth in U. S. real GDP 1950 -2012 • Increased more than sixfold • 3. 1% per year • Growth in U. S. real GDP per capita • Increased more than 3 fold • At roughly 2% per year • Qualifications • Improved products and services • Added leisure • Other impacts

Economic Growth Real GDP and Real GDP per Capita LO 1

Modern Economic Growth • Began with the Industrial Revolution in late • • • LO 2 1700 s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled

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 LO 2

Modern Economic Growth Country United States United Kingdom France Ireland Japan Singapore Hong Kong South Korea LO 2 Real GDP per capita, 1960 $ 14, 766 11, 257 9, 347 6, 666 5, 472 4, 149 3, 849 1, 765 Real GDP per capita, 2010 $41, 365 34, 268 31, 299 34, 877 31, 477 55, 862 38, 865 26, 609 Average annual growth rate, 1960 -2010 2. 1% 2. 2 2. 4 3. 3 3. 5 5. 2 4. 6 5. 4 Note: GDP figures for all countries are measured in “international dollars” of equal value to U. S. dollars in 2005. Source: Penn World Table version 7. 1, pwt. econ. upenn. edu. Used by permission of the Center for International Comparisons at the University of Pennsylvania

Modern Economic Growth LO 2

Institutional Structures of Growth • • • LO 2 Strong property rights Patents and copyrights Efficient financial institutions Literacy and widespread education Free trade Competitive market system

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 LO 3

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 LO 3

Production Possibilities From Chapter 1: C Capital Goods A Economic Growth c a B LO 3 b D Consumer Goods

Labor and Productivity Real GDP = hours of work x labor productivity • Size of employed labor force Labor Inputs (hours of work) • Average hours of work x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other LO 3 = Labor Productivity (average output per hour) Real GDP

U. S. Economic Growth Accounting for the Growth of U. S. Real GDP, 1953 -2011, Plus Projection from 2011 -2022 (Average Annual Percentage Changes) Item 1953 Q 2 To 1973 Q 4 Increase in real GDP 1973 Q 4 To 1995 Q 4 To 2001 Q 1 To 2011 Q 1 Projected 2011 Q 1 To 2021 Q 4 3. 6 2. 8 3. 8 1. 7 2. 5 Increase in quantity of labor 1. 1 1. 3 1. 4 -0. 7 0. 2 Increase in labor productivity 2. 5 1. 5 2. 4 2. 3 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. LO 3

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%) LO 4

Accounting for Growth Average Test Scores of Eighth Grade Students in Math and Science, 2011 Mathematics LO 4 Science

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 LO 5

Productivity Growth • Microchip/information technology • Start-up firms and increasing returns • Sources of increasing returns • More specialized inputs • Spreading of development costs • Simultaneous consumption • Network effects • Learning by doing • Global competition LO 5

Productivity Growth LO 5

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 LO 6

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 LO 6

Global Perspective LO 6

Can Economic Growth Survive Population Decline? • As nations industrialize, their economies shift from agriculture to industry • Fertility rates fall • Decrease in population • Each generation smaller than the one before • Inverse dependency ratio • Social security issues • Innovation and productivity LO 5