macroeconomic mcgrowhill macro ch 8 19e use this one

08 Economic Growth McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Economic Growth • Increase in real GDP or real GDP per • • • capita over some time period Percentage rate of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP LO1 = 70 annual percentage rate of growth 8-2 Economic Growth • Growth in U.S real GDP 1950-2009 • Increased fold • 3.2% per year • Growth in U.S real GDP per capita • Increased more than fold • 2% per year • Qualifications • Improved products and services • Added leisure • Other impacts LO1 8-3 Economic Growth Real GDP and Real GDP per Capita LO1 (4) Real GDP, Per Capita, 2005$ (2) ÷ (3) (1) Year (2) Real GDP, Billions of 2005$ 1950 $ 2006 152 $12,197 1960 2831 181 15,640 1970 4270 205 20,829 1980 5839 228 25,610 1990 8034 250 32,136 2000 11,226 282 39,809 2009 12,987 307 42,303 (3) Population, Millions Source: Bureau of Economic Analysis, http://www.bea.gov and U.S Census Bureau, http://www.census.gov 8-4 Modern Economic Growth • Began with the Industrial Revolution • • • • • LO2 in late 1700s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled 8-5 Modern Economic Growth • Began in Britain • Has spread slowly • Starting date main cause of worldwide • LO2 differences in living standards Catching up is possible • Leader countries invent technology • Follower countries adopt technology • Can grow faster 8-6 Modern Economic Growth Country Real GDP per capita, 1960 United States $ 14,766 United Kingdom 11,257 France 9,347 Ireland 6,666 Japan 5,473 Singapore 4,149 Hong Kong 3,849 South Korea 1,765 Real GDP per capita, 2007 $42,887 32,181 29,663 41,625 30,585 44,619 43,121 23,850 Average annual growth rate, 1960-2007 2.3% 2.3 2.5 4.0 3.7 5.2 5.3 5.7 Figures are in 2005 dollars Source: Penn World Table version 6.3, pwt.econ.upenn.edu LO2 8-7 Modern Economic Growth LO3 8-8 Institutional Structures of Growth • Strong property rights • Patents and copyrights • Efficient financial institutions • Literacy and widespread education • Free trade • Competitive market system LO3 8-9 Determinants of Growth • Supply factors • Increases in quantity and quality of natural resources • Increases in quality and quantity of human resources • Increases in the supply (or stock) of capital goods • Improvements in technology LO3 8-10 Production Possibilities From Chapter 1: Capital Goods C A Economic Growth c b a B D Consumer Goods LO3 8-12 Labor and Productivity Real GDP = hours of work x labor productivity • Size of employed labor force Labor Inputs (hours of work) • Average hours of work x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other LO3 = Real GDP Labor Productivity (average output per hour) 8-13 U.S Economic Growth Accounting for the Growth of U.S Real GDP, 1953-2007, Plus Projection from 2009-2020 1953 Q2 To 1973 Q4 Item Increase in real GDP 1973 Q4 To 1995 Q4 1995 Q4 To 2001 Q1 2001 Q1 To 2007 Q3 Projected 2009 Q1 To 2020 Q4 3.6 2.8 3.8 2.6 2.5 Increase in quantity of labor 1.1 1.3 1.4 -0.1 0.2 Increase in labor productivity 2.5 1.5 2.4 2.7 2.3 (Average Percentage Changes) Source: Derived from Economic Report of the President, 2008, p 45; and Economic Report of the President, 2010, p 76 LO3 8-14 Accounting for Growth • Factors affecting productivity growth • Technological advance (40%) • Quantity of capital (30%) • Education and training (15%) • Economies of scale and resource allocation (15%) LO3 8-15 Accounting for Growth Average Test Scores of Eighth Grade Students in Math and Science, 2007 Mathematics LO3 Science 8-16 Productivity Growth • Average rate of growth • 1.5% per year 1973-1995 • 2.8% per year 1995-2009 • Affects real output, real income, and • LO4 real wages Pay higher wages without lowering profit 8-17 Productivity Growth • Microchip/information technology • New firms and increasing returns • Sources of increasing returns • More specialized inputs • Spreading of development costs • Simultaneous consumption • Network effects • Learning by doing • Global competition LO4 8-18 Productivity Growth LO5 8-19 Economic Growth • Is economic growth desirable and • • LO5 sustainable? The antigrowth view • Environmental and resource issues In defense of economic growth • Higher standard of living • Human imagination can solve environmental and resource issues 8-20 Economic Growth • Growth is the path to greater material • • • LO5 abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge 8-21 Alternative Thoughts on Economic Success • Is GDP growth an effective measure of economic success? • Consider another school of thought: Buddhist Economics • Using consumption (e.g GDP) as a measure of well being is irrational • Alternatively, consider that ethics based analysis is more rational (I) minimize suffering, (II) simplifying desires, (III) non-violence, (IV) genuine care, and (V) generosity Alternative Thoughts on Economic Success • E F Schumacher – well known economist that wrote “Small is Beautiful” in 1973 • Energy Crisis underway resulting from the Arab Crude Oil Embargo • The world woke up to the fact that hydrocarbons were finite on planet Earth • Happiness should not come from consumption and the reckless use of finite resources, but rather should come from wanting fewer “things” Alternative Thoughts on Economic Success • Gross National Happiness • A worldwide believe system that focuses on psychological wellbeing, rather than consumption • Emotional balance, mental health, spirituality and quality of life Global Perspective LO5 8-25 Economic Growth in China • Growth averages past 25 years: • 9% annual growth output • 8% annual growth output per capita • Labor more productive • More international trade • Transition to market economy • Joined WTO 2001 • Financial system remains weak • Income inequality across areas LO5 8-26 ... $ 2006 152 $12,197 1960 283 1 181 15,640 1970 4270 205 20 ,82 9 1 980 583 9 2 28 25,610 1990 80 34 250 32,136 2000 11,226 282 39 ,80 9 2009 12, 987 307 42,303 (3) Population, Millions Source: Bureau of... 6,666 Japan 5,473 Singapore 4,149 Hong Kong 3 ,84 9 South Korea 1,765 Real GDP per capita, 2007 $42 ,88 7 32, 181 29,663 41,625 30, 585 44,619 43,121 23 ,85 0 Average annual growth rate, 1960-2007 2.3%... Improvements in technology LO3 8- 10 Determinants of Growth • Demand factor • Households, businesses, and • LO3 government must purchase the economy’s expanding output Efficiency factor • Must achieve economic