04/20/23 1

Chapter 8

04/20/23 1

04/20/23 2

Economic growth (8.1)Either:

An increase in real GDP (or real GDP per capita) occurring over some time period

[(Real GDP year 2-real GDP year 1)/real GDP year 1] x 100

Real GDP per capita = Real GDP/size of population

04/20/23 2

04/20/23 3

Growth as a GoalWidely held economic goal

Growth leads to an increase in wages & improved standard of living

Economy is better able to meet people’s wants & resolve socioeconomic problems

04/20/23 3

04/20/23 4

Arithmetic of GrowthSmall changes in growth make a HUGE

difference

Rule of 70Tells us how many years it will take for real

GDP to doubleFormula:

70/annual percentage rate of growth

04/20/23 4

04/20/23 5

Growth in the U.S.Since 1950, real GDP has increased about sixfold but

the U.S. population has also increased

Real GDP per capita has increased more than threefoldReal GDP has grown at an annual rate of about 3.5

percent since 1950 and per capita has increased about 2.3 percent

Reasons why:Improved products & servicesAdded leisure (standard workweek has shrunk from 50

hours to approx. 35)Other impacts

04/20/23 5

04/20/23 6

Uneven distribution of growth (8.2)The different starting dates for modern economic

growth is the main cause of the differences in per capita GDP levels seen today

Catching up is possiblePeople can adopt technology more quickly than

they can invent it

Leader countries – inventing & implementing new technology is slow & costly so the growth is smaller

Follower countries – can grow much faster because they simply adopt existing technology

04/20/23 6

04/20/23 7

Institutional structures that promote growth (8.3)Strong property rights

Patents & copyrights

Efficient financial institutions

Literacy & widespread education

Free trade

A competitive market system04/20/23 7

04/20/23 8

Ingredients of growth Supply factors

Four of the ingredients of economic growth relate to the physical ability of the economy to expand

Increases in the quantity & quality of natural resources Increases in the quantity & quality of human resources Increases in the supply (or stock) of capital goods Improvements in technology

Demand factor Households, businesses, & government must purchase the

economy’s expanding output of goods & services

Efficiency factor To reach its full production potential, an economy must achieve

economic efficiency as well as full employment

04/20/23 8

04/20/23 9

Production possibilities analysis Labor & productivity – Society can increase its real output and income in

two fundamental ways:

Increasing its inputs of resources Raising the productivity of those inputs

Real GDP = hours of work x labor productivity

Hours of work Depends on size of employed labor force & length of average

workweek

Labor productivity Determined by technological progress, quantity of capital goods

available to workers, quality of labor itself, & efficiency with which inputs are allocated, combined, & managed

04/20/23 9

04/20/23 10

Accounting for growthGrowth accounting

Used by Council of Economic Advisors (CEA)Assesses the relative importance of supply-

side elements that contribute to changes in real GDP (i.e. hours of work & labor productivity)

Labor inputs vs. labor productivity – When both are increasing, it’s an important sources of economic growth

04/20/23 10

04/20/23 11

Technological advanceLargest contributor to productivity growth

Accounts for about 40% of productivity growth

Includes not only innovative production techniques but new managerial methods & new forms of business organization

Generated by discovery of new knowledge which allows resources to be combined in improved ways that increase output

04/20/23 12

Quantity of capitalIncreased capital explains roughly 30% of

productivity growth

More & better plant & equipment make workers more productive

Some capital substitutes for labor, but most capital is complementary to labor (making labor more productive)

04/20/23 13

Education & trainingHuman capital

Knowledge & skills that make a worker productive

Investment in human capital

Includes not only formal education but also on-the-job training

An estimated 15% of productivity growth is derived from investments in people’s education & skills

04/20/23 14

Economies of scale & resource allocationExplains the remaining 15% of productivity

growth

Reductions in per-unit production costs that result from increases in output levels

Markets have increased in size over timeThis allows firms to increase output levelsAble to use larger, more productive equipment

Use new methods of manufacturing & delivery that increase productivity

04/20/23 15

Improved Resource AllocationMeans workers over time have moved from

low-productivity employment to high-productivity employment

I.E. moving from agriculture to manufacturing jobs to technology

04/20/23 16

Recent productivity acceleration (8.4)Microchip & information technology

Widespread availability of personal & laptop computers stimulated the desire to tie them together (Internet & e-commerce)

04/20/23 16

04/20/23 17

New firms & increasing returnsIncreasing returns- situation in which a % increase in

the amount of inputs a firm uses leads to an even larger % increase in the amount of output the firm produces

Firms can exploit several different sources of increasing returns & economies of scale

More specialized inputsSpreading of development costsSimultaneous consumptionNetwork effectsLearning by doing

04/20/23 18

What can we conclude?Prospects for a lasting increase in

productivity growth are good

Time will tell if productivity growth will be a long-run sustainable trend

04/20/23 18

04/20/23 19

Is growth desirable & sustainable?Antigrowth view

Critics state that growth results in pollution, global warming, ozone depletion, & other environmental problems.

Also, little evidence that economic growth solves problems such as poverty, homelessness, & discrimination

04/20/23 19

04/20/23 20

In defense of economic growthEnables a society to do the following:

Improve the nation’s infrastructureEnhance care for the sick & elderlyProvide greater access for the disabledProvide more police & fire protection