Economic Growth. McGraw-Hill/Irwin. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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1 25 Economic Growth McGraw-Hill/Irwin opyright 2012 by The McGraw-Hill ompanies, Inc. All rights reserved.

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 LO1 25-2

3 Economic Growth Growth in U.S. real GDP 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 25-3

4 Economic Growth Real GDP and Real GDP per apita (1) Year (2) Real GDP, Billions of $ (3) Population, Millions (4) Real GDP, Per apita, 2005$ (2) (3) 1950 $ $12, , , , , , , , ,303 Source: Bureau of Economic Analysis, and U.S. ensus Bureau, LO1 25-4

5 Modern Economic Growth Began with the Industrial Revolution in late 1700s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled LO2 25-5

6 Modern Economic Growth Began in Britain Has spread slowly Starting date main cause of worldwide differences in living standards atching up is possible Leader countries invent technology Follower countries adopt technology an grow faster LO2 25-6

7 Modern Economic Growth Real GDP Real GDP Average annual per capita, per capita, growth rate, ountry United States $ 14,766 $42, % United Kingdom 11,257 32, France 9,347 29, Ireland 6,666 41, Japan 5,473 30, Singapore 4,149 44, Hong Kong 3,849 43, South Korea 1,765 23, Figures are in 2005 dollars Source: Penn World Table version 6.3, pwt.econ.upenn.edu LO2 25-7

8 Modern Economic Growth LO3 25-8

9 Institutional Structures of Growth Strong property rights Patents and copyrights Efficient financial institutions Literacy and widespread education Free trade ompetitive market system LO3 25-9

10 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 LO

11 Determinants of Growth Demand factor Households, businesses, and government must purchase the economy s expanding output Efficiency factor Must achieve economic efficiency and full employment LO

12 apital Goods Production Possibilities From hapter 1: A Economic Growth a c b B D LO3 onsumer Goods 25-12

13 Labor and Productivity Real GDP = hours of work x labor productivity Size of employed labor force Average hours of work Technological advance Quantity of capital Education and training Allocative efficiency Other x Labor Inputs (hours of work) Labor Productivity (average output per hour) = Real GDP LO

14 U.S. Economic Growth Accounting for the Growth of U.S. Real GDP, , Plus Projection from Projected 1953 Q Q Q Q Q1 Item To 1973 Q4 To 1995 Q4 To 2001 Q1 To 2007 Q3 To 2020 Q4 Increase in real GDP Increase in quantity of labor Increase in labor productivity (Average Percentage hanges) Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2010, p. 76 LO

15 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%) LO

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

17 Productivity Growth Average rate of growth 1.5% per year % per year Affects real output, real income, and real wages Pay higher wages without lowering profit LO

18 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 LO

19 Productivity Growth LO

20 Economic Growth 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 LO

21 Economic Growth Growth is the path to greater material abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge LO

22 Global Perspective LO

23 Economic Growth in hina 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 areas LO

24 Video Education Video hinese Bubble Video hinese Growth

25 hinese student enrolments rose in the US to nearly 158,000 students, putting hina in the lead. Growth in international enrolments is an economic boon for the US. International students contribute more than $21 billion to the US economy, $10.2 billion more than a decade ago. They also stimulate the local economy by paying rent and buying items such as health insurance and textbooks, generating revenue of nearly $3 billion in some states. The top fields of study include: business and management, and engineering, followed by physical and life sciences, mathematics and social sciences.

26 Practice Question 1. Real GDP per capita is found by: A. adding real GDP and population. B. subtracting population from real GDP.. dividing real GDP by population. D. dividing population by real GDP.

27 Practice Question 2. At an annual growth rate of 7 percent, real GDP will double in about: A. 11 ½ years. B. 10 years.. 13 ½ years. D. 9 years. B

28 Practice Question 3. Refer to the table. Between years 1 and 2, real GDP grew by percent in Alta. A. 3 B D. 10

29 Practice Question 4. Real per capita GDP: A. grows at approximately the same rate for all countries. B. was much more equal across nations in 1820 than it is today.. has been about 20 times higher in the richer nations than the poorer nations for about 2000 years. D. grows much faster in "leader countries" than in "follower countries." B

30 Practice Question 5. Which of the following institutional arrangements is most likely to promote growth? A. Patents and copyrights that expire quickly and are loosely enforced. B. Strong government control over resource allocation decisions.. Unrestricted trade between nations. D. All of these.

31 Practice Question 6. Other things equal, which of the following would increase the rate of economic growth, as measured by changes in real GDP? A. A decline in the average length of the work week. B. A decrease in the labor force participation rate.. An increase in the size of the working age population. D. A decline in the amount of capital per worker.

32 Practice Question 7. Suppose total output (real GDP) is $4000 and labor productivity is $8. We can conclude that: A. real GDP per capita must be $500. B. the price-level index must be greater than nominal GDP must be $500. D. the number of worker-hours must be 500. D

33 Practice Question 8. Refer to the above graph. Growth of production capacity is shown by the: A. shift from AB to D. B. shift from D to AB.. movement away from point A and toward point B. D. movement away from point B and toward point A. A

34 Practice Question 9. Human capital refers to: A. the skills and knowledge that enable a worker to be productive. B. machinery used by labor in production.. the accumulated financial wealth of households. D. physical capital owned by households rather than businesses. A

35 Practice Question 10. A nation's infrastructure refers to: A. its ability to realize economies of scale. B. its stock of technological knowledge.. public capital goods such as highways and sanitation systems. D. the productivity of its labor force.

36 Practice Question 11. Which of the following would not be expected to increase labor productivity? A. technological advance B. the acquisition of more education and training by the labor force. an increase in the size of the labor force D. the realization of economies of scale

37 Practice Question 12. If the growth trend of labor productivity is 3 percent per year, the number of years that it will take for the standard of living to double will be about: A. 15 years. B. 17 years.. 20 years. D. 23 years. D

38 Practice Question 13. All of the following are economic implications of the recent rise in the average rate of productivity growth except: A. a lower natural rate of unemployment. B. larger outward shifts of the economy's production possibilities curve.. an end to the business cycle. D. a greater rate of economic growth.

39 Practice Question 14. Economists who believe that the recent rise in the average rate of productivity growth will be long lasting say that: A. the United States is entering an era of high structural unemployment due to rapid technological change. B. technological advance creates its own supply, which in turn creates its own demand.. innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate. D. technological change will require more central planning and government regulation.

40 Practice Question 15. Increases in the value of a product to each user, including existing users, as the total number of users rises are called: A. information cascades. B. learning effects.. network effects. D. scale economies.

41 Practice Question 16. ritics of economic growth: A. contend that growth and industrialization reduce pollution. B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.. point out that growth results in greater economic security for workers. D. say that its benefits accrue nearly exclusively to white males. B

42 Practice Question 17. Proponents of economic growth make all of the following arguments except: A. Growth is the basic means of improving living standards. B. It is easier to reduce poverty when the economy is growing than when it is not.. There is a direct relationship between a growing real GDP and rising pollution. D. Growth provides an economic environment favorable to education and self-fulfillment.