micro economics chapter 08

8
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
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•
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capita over some time period
Percentage rate of growth
Growth lessens burden of scarcity
Arithmetic of growth: Rule of 70

Approximate
number of years
required to double
real GDP
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=

70
annual percentage rate
of growth

•
•

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Economic Growth
Growth U.S. real GDP 1950-2015
• 3.1% per year
Growth in U.S. real GDP per capita
• 2% per year


Modern Economic Growth

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

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Modern Economic Growth

• Time for leisure
• Social change
• Democracy
• Human lifespan doubled

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Modern Economic Growth

• Began in 1700s with Industrial Revolution
• Has spread slowly
• Starting date main cause of worldwide
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differences in living standards
Catching up is possible
Leader countries invent technology
Follower countries adopt technology
• Can grow faster


Modern Economic Growth

Country

Real GDP
per capita,
1960

United States
$ 14,766
United Kingdom
11,257
France
9,347
Ireland
6,666
Japan
5,472
Singapore
4,149
Hong Kong
3,849
South Korea
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

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

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Institutional Structures of Growth

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

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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

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Determinants of Growth

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

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

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=
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)

Source: Derived from Economic Report of the President, 2008, p. 45; Economic Report of the
President, 2016, p. 113; Bureau of Economic Analysis; and Bureau of Labor Statistics.

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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%)

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

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Science