micro economics chapter 08

8 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 lessens burden of scarcity Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP LO1 = 70 annual percentage rate of growth • • LO1 Economic Growth Growth U.S real GDP 1950-2015 • 3.1% per year Growth in U.S real GDP per capita • 2% per year Modern Economic Growth • Sustained and ongoing increases in living standards causing dramatic increases in the standard of living in less than a single lifetime LO2 Modern Economic Growth • Time for leisure • Social change • Democracy • Human lifespan doubled Help Desk LO2 Modern Economic Growth • Began in 1700s with Industrial Revolution • 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 Modern Economic Growth Country Real GDP per capita, 1960 United States $ 14,766 United Kingdom 11,257 France 9,347 Ireland 6,666 Japan 5,472 Singapore 4,149 Hong Kong 3,849 South Korea 1,765 Real GDP per capita, 2010 $41,365 34,268 31,299 34,877 31,477 55,862 38,865 26,609 Average annual growth rate, 1960-2010 2.1% 2.2 2.4 3.3 3.5 5.2 4.6 5.4 Figures are in 2005 dollars Source: Penn World Table version 6.3, pwt.econ.upenn.edu LO2 Modern Economic Growth LO3 Institutional Structures of Growth • Strong property rights • Patents and copyrights • Efficient financial institutions • Literacy and widespread education • Free trade • Competitive market system LO3 Determinants of Growth • Supply factors • Increases in quantity and quality of natural and human resources • Increases in the supply (or stock) of capital goods • Improvements in technology LO3 Determinants of Growth • Demand factor • Households, businesses, and • LO3 government must purchase the economy’s expanding output Efficiency factor • Must achieve economic efficiency and full employment 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 = Labor Productivity (average output per hour) Real GDP U.S Economic Growth Accounting for the Growth of U.S Real GDP, 1953-2011, Plus Projection from 2011-2022 (Average Annual Percentage Changes) Source: Derived from Economic Report of the President, 2008, p 45; Economic Report of the President, 2016, p 113; Bureau of Economic Analysis; and Bureau of Labor Statistics LO3 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 Accounting for Growth Average Test Scores of Eighth Grade Students in Math and Science, 2011 Mathematics LO3 Science ... 2011-2022 (Average Annual Percentage Changes) Source: Derived from Economic Report of the President, 2 008, p 45; Economic Report of the President, 2016, p 113; Bureau of Economic Analysis; and Bureau