macroeconomic mcgrowhill macro ch 8 19e use this one

08
Economic Growth

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

Approximate
number of years
required to double
real GDP
LO1

=

70
annual percentage rate
of growth

8-2


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

8-3


Economic Growth
Real GDP and Real GDP per Capita

LO1

(4)

Real GDP,
Per Capita,
2005$
(2) ÷ (3)

(1)
Year

(2)
Real GDP,
Billions of 2
2005$

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

(3)
Population,
Millions

Source: Bureau of Economic Analysis,
and U.S. Census Bureau,
8-4


Modern Economic Growth

• Began with the Industrial Revolution
•
•
•
•
•
LO2

in late 1700s
Ongoing increases in living standards

Time for leisure
Social change
Democracy
Human lifespan doubled
8-5


Modern Economic Growth

• Began in Britain
• Has spread slowly
• Starting date main cause of worldwide
•

LO2

differences in living standards
Catching up is possible
• Leader countries invent technology
• Follower countries adopt technology
• Can grow faster
8-6


Modern Economic Growth

Country

Real GDP
per capita,

1960

United States
$ 14,766
United Kingdom
11,257
France
9,347
Ireland
6,666
Japan
5,473
Singapore
4,149
Hong Kong
3,849
South Korea
1,765

Real GDP
per capita,
2007
$42,887
32,181
29,663
41,625
30,585
44,619
43,121
23,850

Average annual
growth rate,
1960-2007
2.3%
2.3
2.5
4.0
3.7
5.2
5.3
5.7

Figures are in 2005 dollars
Source: Penn World Table version 6.3, pwt.econ.upenn.edu
LO2

8-7


Modern Economic Growth

LO3

8-8


Institutional Structures of Growth

• Strong property rights

• Patents and copyrights
• Efficient financial institutions
• Literacy and widespread education
• Free trade
• Competitive market system

LO3

8-9


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

8-10


Determinants of Growth

• Demand factor
• Households, businesses, and

•

LO3

government must purchase the
economy’s expanding output
Efficiency factor
• Must achieve economic efficiency
and full employment

8-11


Production Possibilities
From Chapter 1:

Capital Goods

C

A

Economic
Growth
c

b

a

B

D

Consumer Goods
LO3

8-12


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

LO3

=

Real
GDP

Labor
Productivity
(average
output per
hour)

8-13


U.S. Economic Growth
Accounting for the Growth of U.S. Real
GDP, 1953-2007, Plus Projection from
2009-2020
1953 Q2
To 1973 Q4

Item

Increase in real GDP

1973 Q4
To 1995 Q4

1995 Q4
To 2001 Q1

2001 Q1
To 2007 Q3

Projected
2009 Q1
To 2020 Q4

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

(Average Percentage Changes)
Source: Derived from Economic Report of the President, 2008, p. 45;
and Economic Report of the President, 2010, p. 76
LO3

8-14


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

8-15


Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, 2007
Mathematics

LO3

Science

8-16


Productivity Growth

• Average rate of growth
• 1.5% per year 1973-1995
• 2.8% per year 1995-2009
• Affects real output, real income, and
•

LO4

real wages
Pay higher wages without lowering
profit

8-17


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 competition
LO4

8-18


Productivity Growth

LO5

8-19


Economic Growth

• Is economic growth desirable and
•
•

LO5

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
8-20


Economic Growth

• Growth is the path to greater material
•
•
•

LO5

abundance
Results in higher standards of living
Increases leisure time
Allows for the expansion and
application of human knowledge

8-21


Alternative Thoughts on Economic Success

• Is GDP growth an effective measure of
economic success?
• Consider another school of thought:
Buddhist Economics
• Using consumption (e.g. GDP) as a measure of well
being is irrational
• Alternatively, consider that ethics based analysis is more
rational (I) minimize suffering, (II) simplifying desires, (III)
non-violence, (IV) genuine care, and (V) generosity


Alternative Thoughts on Economic Success

• E. F. Schumacher – well known economist
that wrote “Small is Beautiful” in 1973
• Energy Crisis underway resulting from the Arab Crude Oil
Embargo
• The world woke up to the fact that hydrocarbons were finite
on planet Earth

• Happiness should not come from
consumption and the reckless use of finite
resources, but rather should come from
wanting fewer “things”


Alternative Thoughts on Economic Success

• Gross National Happiness
• A worldwide believe system that
focuses on psychological wellbeing, rather than consumption
• Emotional balance, mental health,
spirituality and quality of life


Global Perspective

LO5

8-25