Lecture Economics (18th edition): Chapter 25 - McConnell, Brue, Flynn''s

Chapter 25
Economic
Growth

McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


Chapter Objectives
• Modern economic growth and
increasing living standards
• Growth accounting
• U.S. productivity growth
• Is growth desirable and
sustainable?

25-2


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

=

70
annual percentage rate
of growth
25-3


Economic Growth
• Growth U.S. real GDP 1950-2005
– Increased 6 fold
– 3.5% per year

• Growth in U.S. real GDP per capita
– Increased more than 3 fold
– 2.3% per year

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

25-4


Modern Economic Growth
• Began with the Industrial Revolution
in late 1700’s
• Ongoing increases in living standards
• Time for leisure

• Social change
• Democracy
• Human lifespan doubled
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
25-6


Real GDP Per Capita
Country

Real GDP
per capita,
1960

United States
United Kingdom
France
Ireland
Japan

Singapore
Hong Kong
South Korea

Real GDP
per capita,
2004

$12,892
10,323
8,531
5,294
4,509
4,219
3,322
1,458

Figures are in 1996 dollars

Average annual
growth rate,
1960-2004

$36,098
26,762
26,168
28,957
24,661
29,404
29,642

18,424

2.3%
2.2
2.5
3.9
3.9
4.4
5.0
5.8

Source: Penn World Table

25-7


Modern Economic Growth
• Growth-promoting institutional
structures
– Strong property rights
– Patents and copyrights
– Efficient financial institutions
– Literacy and widespread education
– Free trade
– Competitive market system

25-8


Ingredients 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
25-9


Ingredients of Growth
• Demand factor
– Households, businesses, and
government must purchase the
economy’s expanding output

• Efficiency factor
– Must achieve economic efficiency
and full employment

25-10


Production Possibilities
From Chapter 1:

Capital Goods

C

Economic
Growth

A

c

b

a

B

D

Consumer Goods

25-11


Labor and Productivity
Real GDP = hours of work x labor productivity
• Size of
employed
labor force
• Average
hours of
work

Labor
Inputs
(hours of
work)
x

• Technological
advance
• Quantity of
capital
• Education and
training
• Allocative
efficiency
• Other

=

Real
GDP

Labor
Productivity
(average
output per
hour)

25-12

U.S. Economic Growth
Annual Averages for Five Decades
Average Annual Increase (Percent)

5

Real GDP
Real GDP Per Capita

4
3
2
1
0
1950-1959

1960-1969

1970-1979

Year

1980-1989

1990-1999

2000-2005

Source: Bureau of Economic Analysis

25-13


Accounting for Growth
Accounting for Growth of U.S. Real GDP,
1953-2013 (average annual percentage
changes)
1953 Q2
to
1973 Q4

1973 Q4
to
1995 Q2

1995 Q2
to
2001 Q1

2001 Q1
to
2007 Q3

2007 Q3
to
2013 Q4*

3.6

2.8

3.8

2.6

2.8

Increases in
Quantity of Labor

1.1

1.3

1.4

-0.1

0.3

Increases in
Labor Productivity

2.5

1.5

2.4

2.7

2.5

Item

Increases in Real GDP

*Beyond 2007 are Projections

Source: Economic Report of the President, 2008

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%)

25-15


Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, Top 10
Countries and the United States, 2003

Mathematics
1
2
3
4
5
6
7
8
9
10
15

Singapore
South Korea
Hong Kong
Taiwan
Japan
Belgium
Netherlands
Estonia
Hungary
Malaysia
United States

Science
605
589
586
585

570
537
536
531
529
508
504

1 Singapore
2 Taiwan
3 South Korea
4 Hong Kong
5 Estonia
6 Japan
7 Hungary
8 Netherlands
9 United States
10 Australia

578
571
558
556
552
552
543
536
527
527
25-16

Productivity Growth
• Accelerated rate of growth
– 1.4% per year 1973-1995
– 2.9% per year 1995-2005

• Affects real output, real income,
and real wages
• Pay higher wages without
lowering profit
25-17


Accelerated 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
25-18


Economic Growth
• Is accelerated productivity growth

sustainable?
• 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
25-19


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 geographic
areas
25-20


Key Terms
•
•
•
•
•
•
•
•
•
•

economic growth
real GDP per capita
rule of 70
modern economic
growth
leader countries
follower countries
supply factors
demand factor
efficiency factor
labor productivity

• labor-force
participation rate
• growth accounting
• infrastructure
• human capital
• economies of scale
• information technology
• start-up firms
• increasing returns
• network effects
• learning by doing
25-21


Next Chapter Preview…

Business Cycles,
Unemployment,
and Inflation

25-22