Lecture Economics (18th edition): Chapter 25 - McConnell, Brue, Flynn''s

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.

Economic Growth

Chapter 25

Chapter Objectives

• Modern economic growth and

increasing living standards

• Growth accounting

• U.S productivity growth

• Is growth desirable and

sustainable?

annual percentage rate

of growth

Economic Growth

• Growth U.S real GDP 1950-2005

– Increased 6 fold

– 3.5% per year

• Growth in U.S real GDP per capita

– Increased more than 3 fold

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

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

Real GDP Per Capita

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

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

A C

c

Labor and Productivity

• Size of

employed labor force

• Average

hours of work

Labor Inputs (hours of work)

Real GDP

Real GDP = hours of work x labor productivity

x

=

U.S Economic Growth

Annual Averages for Five Decades

Accounting for Growth

Accounting for Growth of U.S Real GDP,

1953-2013 (average annual percentage

changes)

Item

1953 Q2 to

1973 Q4

1973 Q4 to

1995 Q2

1995 Q2 to

2001 Q1

2001 Q1 to

2007 Q3

2007 Q3 to

2.8 1.3 1.5

3.8 1.4 2.4

2.6 -0.1 2.7

2.8 0.3

2.5

Source: Economic Report of the President, 2008

*Beyond 2007 are Projections

• Factors affecting productivity

growth

–Technological advance (40%)

–Quantity of capital (30%)

–Education and training (15%)

–Economies of scale and resource allocation (15%)

Accounting for Growth

Average Test Scores of Eighth Grade

Students in Math and Science, Top 10

Countries and the United States, 2003

504

Singapore Taiwan South Korea Hong Kong Estonia

Japan Hungary Netherlands

United States

Australia

1 2 3 4 5 6 7 8

9

10

578 571 558 556 552 552 543 536

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

• G lobal competition

• The antigrowth view

– Environmental and resource issues

• In defense of economic growth

– Higher standard of living

– Human imagination can solve

environmental and resource issues

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

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Business Cycles,

Unemployment,

and Inflation