Ch 17-ECONOMIC GROWTH

2 POSSIBLE DEFINITIONS:1-INCREASE IN REAL GDP 2-INCREASE IN REAL GDP PER CAPITA

6 INGREDIENTS OF GROWTH 4 SUPPLY FACTORS 1-quantity &

quality of natural resources

2-quantity & quality of human resources

3-supply of capital goods

4-technology

2 DEMAND FACTORS

1-AD must increase for production to expand

2-fully employment of resources with productive & allocative efficiency

PRODUCTION POSSIBILITIES ANALYSIS

Economic Growth

A

B

C

D

a

b

Cap

ital

Go

od

s

Consumer Goods0

GROWTH RECORD OF US

INCREASED 6X SINCE 1950 BUT GROWTH DOESN’T MEASURE:

1-QUALITY IMPROVEMENTS 2-INCREASED LEISURE TIME 3-ADVERSE EFFECTS ON ENVIRONMENT

•Size of employed labor force•Average hours of work

•Technological advance•Quantity of capital•Education and training•Allocative efficiency•Other

REALGDP

SUPPLY DETERMINANTSOF REAL OUTPUT

LaborInputs(Hours

of Work)

LaborProductivity

(AverageOutput

Per Hour)

X =

HOW TO ACCOUNT FOR GROWTH More labor input---accounts for 1/3 of

total economic growth Technological advances—account for

26% of US growth since 1929 Increases of capital—accounts for 18% Education & training—improves quality

of labor 12% of growth from improved resource

allocation & economies of scale

GROWTH IN THE AD-AS MODEL

A

B

C

D

Ca

pit

al G

oo

ds

Consumer Goods

Pri

ce

Lev

el

Real GDP

ASLR1 ASLR2

Q1 Q2

ECONOMIC GROWTH IN THEEXTENDED AD – AS MODEL

Pri

ce L

evel

Real GDP

o

P1

AS2

ASLR1

AD2

Q1

ASLR2

Q2

AD1

AS1

P2

OTHER ITEMS THAT HELP ECONOMIC GROWTH

Social/political/cultural environment that are “growth” friendly

Respect for material success Property rights & legal system Market system rewards growth

NEW ECONOMY BASED ON PRODUCTIVITY ACCELERATION

Improved standard of living based on labor productivity

1-microchip technology 2-new firms & increasing profits

Reasons for increasing returns(profits) A-more specialized inputs B-increased consumption C-spread R & D costs over large output

Keep MC low D-networking make info goods more valuable

PRODUCTIVITY ACCELERATION PART 2

3-Global competition encourages efficiency

4-Faster growth w/o inflation possible with higher productivity

5-NRU decreasing from 6%

IS GROWTH DESIRABLE & SUSTAINABLE? ANTI-GROWTH GROWTH

CAUSES: ENVIRONMENTAL

PROBLEMS HIGH STRESS DEAD-END JOBS;

BURNOUT

PRO-GROWTH GROWTH CAUSES

IMPROVEMENTS IN: STANDARD OF LIVING WORKING CONDITIONS LEISURE GETTING RID OF

POVERTY MORE OPTIONS TO

DEAL WITH ENVIRONMENTAL ISSUES

*ONLY LIMIT TO GROWTH IS HUMAN IMAGINATION