Economic Growth
• In order for growth to occur, economic agents
– producers and consumers – must have the
appropriate incentives.
• Growth accounting focuses on three sources
of long-run economic growth:
– Supply of labor
– Supply of capital
– The level of technology
Economic Growth
• Increases in any one of these elements will
increase real GDP.
• The growth in the supply of labor is primarily
the population growth rate
• Increases in capital or in technology increase
labor productivity and thus increase real GDP
Levers of Growth
• Increasing savings will increase the supply of
loanable funds, decrease interest rates and spur
investment or increases in the capital stock.
• In the U.S., tax incentives are the principal
method to to increase savings.
• IRAs and Roth IRAs are examples.
• During the 1970s and 1980s, stockholders in gas
and electric utility companies received a tax
break if they reinvested their dividends in the
companies.
Levers of Growth
• Getting the most from comparative advantage
by encouraging international trade will also
stimulate growth throughout the world.
• Growth can also be stimulated by improving
the quality and capabilities of the labor force
so workers can be more productive with a
given level of capital and technology
• Improving the quality of education is the
primary tool used here.
Economic Growth
• Economic growth is an increase in the
potential total output of goods and services in
a nation over time.
• Growth is measured by the change in
productive capacity of an economy between
one period of time and another
• Growth can be positive. If a nation’s GDP
increases between one period and the next,
the economy has experienced growth.
Economic Growth
• Growth can be negative.
• If a nation’s GDP decreases between one
period and the next, the economy has
contracted, and is experiencing a recession.
• Growth can be measured as the change in real
GDP or real GDP per capita.
Economic Growth
• Economic growth is considered a desirable
macroeconomic objective because:
– As output grows, income rises and the nation is richer;
– People have access tom ore and a greater variety of
goods and services
– New combinations of goods that previously lay
outside the country’s PPC are now attainable;
• If the rate of economic growth exceeds the rate
of population growth, the average person in a
nation also becomes richer.
Measuring Economic Growth
• Growth is stated as a percentage change in real
GDP from one period of time to the next
Growth rate = GDP2 – GDP1 X 100
GPD1
Where GDP 2 is the real GDP from one year and the
GDP 1 is the GPD during the previous year.
Example: Assume Country A’s real GDP increases
from 150 billion in 2010 to $165 billion in 2011:
Country A’s growth rate = 165 – 150 = 15 X 100 = 10%
150
150
How is Growth Measured?
• Next, assume Country A’s real GDP decreased
from $165 billion to $140 billion between 2011
and 2012:
Country A’s growth rate =
140 – 165 = -25 X 100 = 15.15%
165
165
The real value of Country A’s output decreased by
15.15% between 2011 and 2012.
Country A’s real output fell, indicating the country
experienced a recession