Economic Growth

Chapter 1

What is Economic Growth?

When an economy produces more goods and services, a greater GDP, as time goes by.

Economic Growth is possible if:

(1) More resources are accumulated,

(2) Technology improves, or

(3) Efficiency improves.

Production Possibilities Curve

• Helps explain the sources of economic growth

• Shows that for a fixed amount of resources and a given technology, there are different combinations of efficient output

Production Possibility Curve

• To be very generic-an economy could produce more consumption goods (x) and fewer capital goods (y) or reverse.

• To acquire more rapid growth, an economy would choose to increase production of capital goods and give up some of the consumption goods for the present. The investment into capital good production will, hopefully, payoff in increase consumption goods in the future (shifting out of the curve due to increased capital).

Production Possibility Curve

• The curve will also shift outward if there are technological advances that can be applied to increase output from fixed resources.

• Efficiency improvements do not shift the curve outward, it allows points on the curve to become attainable. The economy would move from producing within the curve to producing on the curve or closer to it.

Productivity Growth

• Growth in productivity or output per hour of labor is important b/c it limits how fast compensation per hour can grow.

• In the 70s and 80s, many saw their incomes grow but for many this was b/c family members were working more hours.

• 1960-73: 3% growth 1973-90: 1% growth 1990-2001: 2% growth

Components of Productivity Growth

• Capital Intensity: The ratio of capital to labor in production; units of capital per unit of labor.

• Technical Change: Technological and efficiency improvements combined.

• The 1990s saw increased competition and the growth of technology which may have started the beginning of a long period of growth.

The U.S. and Other Developed Countries

• Japan and European countries are closing the gap with the U.S. due in part to: – greater average hours worked per worker in Japan, – the greater # of employed people in Japan, – rapid growth of capital intensity,– slower employment growth in the U.S. relative to Europe

and Japan, – more room for efficiency improvement (structural effects,

tech diffusion effects, and foreign-trade effects).

Developing Countries

• Successful attributes:– Policies encourage the est. of a private business sector &

est. secure property rights– Encourage domestic saving & investment– Invested heavily in education– Rapid accumulation of capital– Open to foreign influences– Avoid extreme inflation while allowing individual product &

labor markets to adjust to changing demand & supply conditions

– Allow individuals to make economic decisions as they see fit