Chapter 25
Economic
Growth
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-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?
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