EconomicGrowthChapter 25McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter ObjectivesModern economic growth and increasing living standardsGrowth accountingU.S. productivity growthIs growth desirable and sustainable?

Economic GrowthIncrease in real GDP or real GDP per capita over some time periodPercentage rate of growthGrowth as a goalArithmetic of growth: Rule of 70Approximatenumber of yearsrequired to doublereal GDP=70annual percentage rateof growth

Economic GrowthGrowth U.S. real GDP 1950-2005Increased 6 fold 3.5% per year Growth in U.S. real GDP per capitaIncreased more than 3 fold2.3% per yearQualifications Improved products and servicesAdded leisureOther impacts

Modern Economic GrowthBegan with the Industrial Revolution in late 1700sOngoing increases in living standardsTime for leisureSocial changeDemocracyHuman lifespan doubled

Modern Economic GrowthBegan in BritainHas spread slowlyStarting date main cause of worldwide differences in living standardsCatching up is possibleLeader countries invent technologyFollower countries adopt technologyCan grow faster

Real GDP Per CapitaReal GDPReal GDPAverage annualper capita,per capita,growth rate, Country 1960 2004 1960-2004United States$12,892$36,0982.3%United Kingdom10,323 26,7622.2France8,531 26,1682.5 Ireland 5,294 28,9573.9Japan 4,509 24,6613.9Singapore 4,219 29,4044.4Hong Kong 3,322 29,6425.0South Korea 1,458 18,4245.8Figures are in 1996 dollarsSource: Penn World Table

Modern Economic GrowthGrowth-promoting institutional structuresStrong property rightsPatents and copyrightsEfficient financial institutionsLiteracy and widespread educationFree tradeCompetitive market system

Ingredients of GrowthSupply factorsIncreases in quantity and quality of natural resources Increases in quality and quantity of human resourcesIncreases in the supply (or stock) of capital goodsImprovements in technology

Ingredients of GrowthDemand factorHouseholds, businesses, and government must purchase the economys expanding output Efficiency factorMust achieve economic efficiency and full employment

Production PossibilitiesFrom Chapter 1:Consumer GoodsCapital GoodsaEconomicGrowthbACBDc

Labor and ProductivitySize of employed labor forceAverage hours of workLaborInputs(hours ofwork)Technological advanceQuantity of capitalEducation and trainingAllocative efficiencyOtherLaborProductivity(average output per hour)RealGDPReal GDP = hours of work x labor productivityx=

U.S. Economic GrowthAnnual Averages for Five DecadesSource: Bureau of Economic Analysis

Accounting for GrowthAccounting for Growth of U.S. Real GDP, 1953-2013 (average annual percentage changes)

Factors affecting productivity growthTechnological advance (40%)Quantity of capital (30%)Education and training (15%)Economies of scale and resource allocation (15%)Accounting for Growth

Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003MathematicsScienceAccounting for Growth

Productivity GrowthAccelerated rate of growth1.4% per year 1973-19952.9% per year 1995-2005Affects real output, real income, and real wagesPay higher wages without lowering profit

Accelerated Productivity GrowthMicrochip/information technologyNew firms and increasing returnsSources of increasing returnsMore specialized inputsSpreading of development costsSimultaneous consumptionNetwork effectsLearning by doingGlobal competition

Economic GrowthIs accelerated productivity growth sustainable?Is economic growth desirable and sustainable?The antigrowth viewEnvironmental and resource issuesIn defense of economic growthHigher standard of livingHuman imagination can solve environmental and resource issues

Economic Growth in ChinaGrowth averages past 25 years:9% annual growth output8% annual growth output per capitaLabor more productiveMore international tradeTransition to market economyJoined WTO 2001Financial system remains weakIncome inequality across geographic areas

Key Termseconomic growthreal GDP per capitarule of 70modern economic growthleader countriesfollower countriessupply factorsdemand factorefficiency factorlabor productivitylabor-force participation rategrowth accountinginfrastructurehuman capitaleconomies of scaleinformation technologystart-up firmsincreasing returnsnetwork effectslearning by doing

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