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Defining Economic GrowthDefining Economic Growth

Economic growth: an increase in Real GDP.Small changes in rates of growth

Big changes over many years Compound Growth

Rule of 72: doubling time is 72 divided by the annual rate of growth.

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Comparing GDP Growth RatesComparing GDP Growth Rates

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GDP Growth Rates GDP Growth Rates and Doubling Timesand Doubling Times

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Per Capita Real GDPPer Capita Real GDP

Per Capita Real GDPPer Capita Real GDP is the real GDP divided is the real GDP divided by the population. by the population.

One reason why GDP might be growing is One reason why GDP might be growing is because the population (and workforce) is because the population (and workforce) is growing. growing.

Higher GDP per capita Higher GDP per capita

Higher standard of livingHigher standard of living

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66

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Economic Economic GrowthGrowth

in in Pictures:Pictures:

Outward Shift Outward Shift in Aggregate in Aggregate

SupplySupply

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Determinants of Growth

Size and quality of the labor force: Size and quality of the labor force: – More and better workers More and better workers More output More output

Capital: Capital: – More and better equipment More and better equipment More output More output

Land/Natural ResourcesLand/Natural Resources– Natural resources are not a necessary condition Natural resources are not a necessary condition

for economic growth … they can be acquired for economic growth … they can be acquired through trade.through trade.

Technology: Technology: ways of combining resources to ways of combining resources to produce output. produce output. – Technological advances Technological advances More output from a More output from a

given amount of resources.given amount of resources.

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Average Population Growth

1010

Average Population Growth

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Productivity

Total Factor Productivity (TFP): the ratio the ratio of an economy’s output to its stock of labor and of an economy’s output to its stock of labor and capital.capital.

Economic Growth =

Growth of Resources + Growth of TFP

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Determinants of Productivity

Labor Quality–Education Education –ExperienceExperience–Demographic changeDemographic changeTechnological InnovationOther Factors–Energy prices–Manufacturing vs. Services–Financial Market Development

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Productivity Growth:Productivity Growth:Annual Average Percentage Change in Average Output per Hour of Annual Average Percentage Change in Average Output per Hour of

LaborLabor

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Levels of EducationUnited States, 1940-2002