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Trends in U.S Economic Growth Growth in the U.S. Economy From 1908 to 2008, annual growth in real GDP per person in the United States averaged 2% . Real GDP per person fell precipitously during the Great Depression and rose rapidly during World War II. Growth was most rapid during the 1960s. Growth slowed during the 1970s and sped up again in the 1980s and1990s.

Trends in U.S Economic Growth

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Trends in U.S Economic Growth. Growth in the U.S. Economy From 1908 to 2008, annual growth in real GDP per person in the United States averaged 2% . Real GDP per person fell precipitously during the Great Depression and rose rapidly during World War II. - PowerPoint PPT Presentation

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Page 1: Trends in U.S Economic Growth

Trends in U.S Economic Growth

Growth in the U.S. EconomyFrom 1908 to 2008, annual growth in real GDP per person in the United States averaged 2% .

Real GDP per person fell precipitously during the Great Depression and rose rapidly during World War II.

Growth was most rapid during the 1960s.

Growth slowed during the 1970s and sped up again in the 1980s and1990s.

Page 2: Trends in U.S Economic Growth

Economic Growth Trends

Page 3: Trends in U.S Economic Growth
Page 4: Trends in U.S Economic Growth

Economic Growth in U.S. vs. Poor Countries The gaps between real GDP per person in the United States and in these countries have widened.

Some economies are converging

Some are diverging

Page 5: Trends in U.S Economic Growth

Sources of Economic Growth

Economic growth is the sustained, year-on-year increase in potential GDP.

• Potential GDP is the quantity of real GDP produced when the quantity of labor employed is the full-employment quantity.

• Short run fluctuations in real GDP resulting from the business cycle are not the basis for economic growth

Page 6: Trends in U.S Economic Growth

Determinants of Potential GDPAggregate production function

• Real GDP changes as the quantity of labor changes, other things held constant.

• An increase in labor increases real GDP.

• Diminishing marginal returns cause RGDP to rise at slower rate as L rises

Page 7: Trends in U.S Economic Growth

Determinants of Potential GDPAggregate Labor Market• real wage rate

– money wage rate divided by the price level.• demand for labor

– shows the quantity of labor demanded as a function of the real wage rate.

– determined by the marginal product of labor• supply of labor

–shows the quantity of labor supplied as a function of the real wage rate.

Page 8: Trends in U.S Economic Growth

The Labor Market and Potential GDP

Labor Demand Curve

The demand for labor is the relationship between the quantity of labor demanded and the real wage rate when all other influences on hiring plans remain the same.

Marginal product of labor curve is same as labor demand curve

Firms will always hire workers if MP> real wage

Profit maximizing firm hires until MP= real wage

Page 9: Trends in U.S Economic Growth

The Labor Market and Potential GDP

Labor supply curve shows quantity of labor supplied for each real wage rate.

Quantity of labor supplied increases as the real wage rate increases for two reasons:1. Hours per person increase (assuming IE<SE)

Income effect (work less if real wage increases)

Substitution effect (work more if real wage increases)

2. Labor force participation increases

Page 10: Trends in U.S Economic Growth

Determinants of Potential GDP

Page 11: Trends in U.S Economic Growth

How Potential GDP Grows

Increase in the supply of labor• taxes on workers

• population growth

• demographics

• retirement incentives

• household technology

Increase in demand for labor

• more productive labor

• Human capital

• physical capital

• technological improvements

• reduced payroll taxes on employers

Page 12: Trends in U.S Economic Growth

Effect of increase in labor supply

• real wage

• labor hours

• real GDP

• productivity (RDGP per hour)

• real GDP per capita• depends on whether population increased

Page 13: Trends in U.S Economic Growth

Effect of increase in labor demand due to increased productivity• Labor demand increases and PF shifts upward.

• real wage

• labor hours

• real GDP

• productivity

• real GDP per capita

Page 14: Trends in U.S Economic Growth

The incentive system created by firms, markets, property rights, and money.

The growth of labor productivity depends on• Physical capital growth• Human capital growth• Technological advances

Why Labor Productivity Grows

Page 15: Trends in U.S Economic Growth

Growth Theories and Policies

Classical growth theory

• growth of real GDP per person is temporary

• when GDP per person rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level.

• Malthus – the “dismal science”

Page 16: Trends in U.S Economic Growth

Growth Theories and Policies

Modern Growth TheoryReal GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labor grow.

Growth ends only if technological change and/or incentives for technological change stops.

Page 17: Trends in U.S Economic Growth

Growth Theories and Policies

New growth theories • Real GDP per person grows because of choices that

people make in the pursuit of profit and growth can persist indefinitely.

• Technological change is driven by profit incentives

• Knowledge is a public good and there may be increasing returns to knowledge (education)

Page 18: Trends in U.S Economic Growth

Achieving Faster GrowthMust increase the growth rate of capital per hour of labor or increase the pace of technological change.

Policies for growth

• stimulate saving with tax incentives

• stimulate investment with tax incentives and appropriate regulatory environment (e.g. patents)

• Stimulate research & development.

Growth Theories and Policies

Page 19: Trends in U.S Economic Growth

Stimulate Research and Development• Because the fruits of basic research and development

efforts can be used by everyone, not all the benefit of a discovery falls to the initial discoverer.

• The market might allocate too few resources to research and development.

• Government subsidies and direct funding might stimulate basic research and development.

• Patents can provide incentive to innovate.

Growth Theories and Policies

Page 20: Trends in U.S Economic Growth