Chapter 9: Economic Growth, the Financial System, and Business Cycles
Long-run economic growth The process by which rising
productivity increases the average standard of living.
Calculating Growth Rates and the Rule of 70
Number of years to double 
70
Growth rate
The Growth in Real GDP
per Capita, US, 1900–2006
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Making
the
Connection
The Connection between
Economic Prosperity and Health
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Long-Run Economic Growth
What Determines the Rate of Long-Run Growth?
Labor productivity The quantity of goods and services that can be
produced by one worker or by one hour of work.
Increases in Capital per Hour Worked
Capital Manufactured goods that
are used to produce other goods
and services.
Technological Change
Economic growth depends more on technological change
than on increases in capital per hour worked.
Technological change is an increase in the quantity of
output firms can produce using a given quantity of inputs.
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
The Role of Technological Change in Growth
Between 1960 and 1995, real GDP per capita in Singapore grew
at an average annual rate of 6.2 percent. This very rapid growth
rate results in the level of real GDP per capita doubling about
every 11.5 years.
In 1995, Alywn Young of the University of Chicago published an
article in which he argued that Singapore’s growth depended
more on increases in capital per hour worked, increases in the
labor force participation rate, and the transfer of workers from
agricultural to nonagricultural jobs than on technological change.
If Young’s analysis was correct, predict what was likely to happen
to Singapore’s growth rate in the years after 1995.
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Making
the
Connection
What Explains Rapid Economic
Growth in Botswana?
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Learning Objective 9.1
Long-Run Economic Growth
Potential Real GDP
FIGURE 9.2
Actual and Potential Real GDP
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
Channeling resources to productive uses
Financial system The system of financial markets and
financial intermediaries through which firms acquire
funds from households.
An Overview of the Financial System
Financial markets Markets where financial
securities, such as stocks and bonds, are
bought and sold.
Financial intermediaries Firms, such as
banks, mutual funds, pension funds, and
insurance companies, that borrow funds from
savers and lend them to borrowers.
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
The Macroeconomics of Saving and Investment
Y = C + I + G + NX
I = Y − C − G - NX
Sprivate = Y + TR − C − T = Y - (T -TR) - C
T - TR = Net taxes
Spublic= (T − TR) − G
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
The Macroeconomics of Saving and Investment
S = Sprivate
+
Spublic
or
S = (Y − (T - TR) − C) + ((T − TR) − G)
or
S = Y − C − G = I + NX
So, we can conclude that total saving must equal total
investment:
I = S - NX
- NX = Capital Inflows
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The Market for Loanable Funds
Demand and Supply in the Loanable Funds Market
The Market for Loanable Funds
Real interest rate
Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
The Market for Loanable Funds
Explaining Movements in Saving, Investment,
and Interest Rates
An Increase in the
Demand for
Loanable Funds
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Chapter 9: Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and the Financial System
The Market for Loanable Funds
Explaining Movements in Saving, Investment,
and Interest Rates
The Effect of a Budget
Deficit on the Market
for Loanable Funds
Crowding out A decline
in private expenditures as
a result of an increase in
government purchases.
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