Chapter 25

Economic Growth

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives
Modern economic growth and increasing living standards Growth accounting U.S. productivity growth Is growth desirable and sustainable?

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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

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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 2.3% per year

Qualifications
Improved products and services Added leisure Other impacts

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Modern Economic Growth

Began with the Industrial Revolution in late 1700s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled
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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
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Real GDP Per Capita

Country Real GDP per capita, 1960 Real GDP per capita, 2004 Average annual growth rate, 1960-2004 2.3% 2.2 2.5 3.9 3.9 4.4 5.0 5.8

United States United Kingdom France Ireland Japan Singapore Hong Kong South Korea

$12,892 10,323 8,531 5,294 4,509 4,219 3,322 1,458

$36,098 26,762 26,168 28,957 24,661 29,404 29,642 18,424

Figures are in 1996 dollars

Source: Penn World Table

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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
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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
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Ingredients of Growth
Demand factor
Households, businesses, and government must purchase the economys expanding output

Efficiency factor
Must achieve economic efficiency and full employment

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Production Possibilities
From Chapter 1:
C

Capital Goods

Economic Growth
c
a b

Consumer Goods

D
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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

=
Labor Productivity (average output per hour)

Real GDP

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U.S. Economic Growth

Annual Averages for Five Decades
5
Average Annual Increase (Percent)

4 3 2 1 0 1950-1959 1960-1969 1970-1979

Real GDP Real GDP Per Capita

1980-1989

1990-1999

2000-2005
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Year

Source: Bureau of Economic Analysis

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 2013 Q4*

Increases in Real GDP Increases in Quantity of Labor Increases in Labor Productivity

*Beyond 2007 are Projections

3.6 1.1 2.5

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

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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%)

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Accounting for Growth

Average Test Scores of Eighth Grade Students in Math and Science, Top 10 Countries and the United States, 2003
Mathematics
1 2 3 4 5 6 7 8 9 10 15 Singapore South Korea Hong Kong Taiwan Japan Belgium Netherlands Estonia Hungary Malaysia United States 605 589 586 585 570 537 536 531 529 508 504

Science
1 Singapore 2 Taiwan 3 South Korea 4 Hong Kong 5 Estonia 6 Japan 7 Hungary 8 Netherlands 9 United States 10 Australia 578 571 558 556 552 552 543 536 527 527
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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
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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
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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
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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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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
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Next Chapter Preview

Business Cycles, Unemployment, and Inflation

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