Chapter 25 - Economic growth. On completion of this chapter students will know how to: List two ways that economic growth is measured; define modern economic growth and explain the institutional structures needed for an economy to experience it; identify the general supply, demand, and efficiency forces that give rise to economic growth; describe growth accounting and the specific factors accounting for economic growth in the United States.
Chapter 25 Economic Growth McGrawưHill/Irwin Copyrightâ2009byTheMcGrawưHillCompanies,Inc.Allrightsreserved Chapter Objectives Modern economic growth and increasing living standards • Growth accounting • U.S productivity growth • Is growth desirable and sustainable? 25-2 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 = 70 annual percentage rate of growth 25-3 Economic Growth • Growth U.S real GDP 1950-2005 – Increased fold – 3.5% per year • Growth in U.S real GDP per capita – Increased more than fold – 2.3% per year • Qualifications – Improved products and services – Added leisure – Other impacts 25-4 Modern Economic Growth • Began with the Industrial Revolution in late 1700’s • Ongoing increases in living standards • Time for leisure • Social change • Democracy • Human lifespan doubled 25-5 Modern Economic Growth • Began in Britain • Has spread slowly • Starting date main cause of worldwide differences in living standards • Catching up is possible • Leader countries invent technology • Follower countries adopt technology – Can grow faster 25-6 Real GDP Per Capita Country Real GDP per capita, 1960 United States United Kingdom France Ireland Japan Singapore Hong Kong South Korea Real GDP per capita, 2004 $12,892 10,323 8,531 5,294 4,509 4,219 3,322 1,458 Figures are in 1996 dollars Average annual growth rate, 1960-2004 $36,098 26,762 26,168 28,957 24,661 29,404 29,642 18,424 2.3% 2.2 2.5 3.9 3.9 4.4 5.0 5.8 Source: Penn World Table 25-7 Modern Economic Growth • Growth-promoting institutional structures – Strong property rights – Patents and copyrights – Efficient financial institutions – Literacy and widespread education – Free trade – Competitive market system 25-8 Ingredients 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 25-9 Ingredients of Growth • Demand factor – Households, businesses, and government must purchase the economy’s expanding output • Efficiency factor – Must achieve economic efficiency and full employment 25-10 Production Possibilities From Chapter 1: Capital Goods C Economic Growth A c b a B D Consumer Goods 25-11 Labor and Productivity Real GDP = hours of work x labor productivity • Size of employed labor force • Average hours of work Labor Inputs (hours of work) x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other = Real GDP Labor Productivity (average output per hour) 25-12 U.S Economic Growth Annual Averages for Five Decades Average Annual Increase (Percent) Real GDP Real GDP Per Capita 1950-1959 1960-1969 1970-1979 Year 1980-1989 1990-1999 2000-2005 Source: Bureau of Economic Analysis 25-13 Accounting for Growth Accounting for Growth of U.S Real GDP, 1953-2013 (average annual percentage changes) 1953 Q2 to 1973 Q4 1973 Q4 to 1995 Q2 1995 Q2 to 2001 Q1 2001 Q1 to 2007 Q3 2007 Q3 to 2013 Q4* 3.6 2.8 3.8 2.6 2.8 Increases in Quantity of Labor 1.1 1.3 1.4 -0.1 0.3 Increases in Labor Productivity 2.5 1.5 2.4 2.7 2.5 Item Increases in Real GDP *Beyond 2007 are Projections Source: Economic Report of the President, 2008 25-14 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%) 25-15 Accounting for Growth Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003 Mathematics 10 15 Singapore South Korea Hong Kong Taiwan Japan Belgium Netherlands Estonia Hungary Malaysia United States Science 605 589 586 585 570 537 536 531 529 508 504 Singapore Taiwan South Korea Hong Kong Estonia Japan Hungary Netherlands United States 10 Australia 578 571 558 556 552 552 543 536 527 527 25-16 Productivity Growth • Accelerated rate of growth – 1.4% per year 1973-1995 – 2.9% per year 1995-2005 • Affects real output, real income, and real wages • Pay higher wages without lowering profit 25-17 Accelerated 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 25-18 Economic Growth • Is accelerated productivity growth sustainable? • Is economic growth desirable and 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 25-19 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 geographic areas 25-20 Key Terms • • • • • • • • • • economic growth real GDP per capita rule of 70 modern economic growth leader countries follower countries supply factors demand factor efficiency factor labor productivity • labor-force participation rate • growth accounting • infrastructure • human capital • economies of scale • information technology • start-up firms • increasing returns • network effects • learning by doing 25-21 Next Chapter Preview… Business Cycles, Unemployment, and Inflation 25-22 ... hour) 2 5- 12 U.S Economic Growth Annual Averages for Five Decades Average Annual Increase (Percent) Real GDP Real GDP Per Capita 195 0-1 959 196 0-1 969 197 0-1 979 Year 198 0-1 989 199 0-1 999 200 0-2 005... achieve economic efficiency and full employment 2 5- 10 Production Possibilities From Chapter 1: Capital Goods C Economic Growth A c b a B D Consumer Goods 2 5- 11 Labor and Productivity Real GDP = hours... • increasing returns • network effects • learning by doing 2 5- 21 Next Chapter Preview… Business Cycles, Unemployment, and Inflation 2 5- 22