Chapter 8 Economic Growth Mc Graw-Hill Irwin Copyright

Chapter 8 Economic Growth Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill 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? 8 -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 8 -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 8 -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 8 -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 8 -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 4. 4 5. 0 5. 8 Source: Penn World Table 8 -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 8 -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 8 -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 8 -10

Production Possibilities From Chapter 1: Capital Goods C Economic Growth A c b a B D Consumer Goods 8 -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) 8 -12

U. S. Economic Growth Annual Averages for Five Decades Average Annual Increase (Percent) Real GDP Per Capita Year Source: Bureau of Economic Analysis 8 -13

Accounting for Growth of U. S. Real GDP, 1953 -2013 (average annual percentage changes) 1953 Q 2 to 1973 Q 4 to 1995 Q 2 to 2001 Q 1 to 2007 Q 3 to 2013 Q 4* 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 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%) 8 -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 578 571 558 556 552 543 536 527 8 -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 8 -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 8 -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 8 -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 8 -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 8 -21

Next Chapter Preview… Business Cycles, Unemployment, and Inflation 8 -22