Chapter 25: Economic Growth

Economic growth - An increase in real GDP occurring over some time period OR An increase in real GDP per capita occurring over some time period * Real GDP per capita - Dividing real GDP by size of population
Expansion of total output → Rising real wages + higher standards of living * Lessens burdens of scarcity
Rule of 70 - We can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70 * Example: A 3 percent annual rate of growth will double real GDP in about 23 ( 70 / 3) years
Growth in US * Strong growth * Qualified by improved products + services & added leisure * Growth rates not constant/smooth
Modern economic growth - Sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime * Mass production * New technology, products, + services * Affected cultural, social, political arrangements
Uneven distribution of growth * Different starting points for growth * Leader countries - Rich countries with real GDP per capita that grows by 2-3% per year * Follower countries - Can grow much faster because they can simply adopt existing technologies from rich leader countries * Growth rates are limited by the rate at which new technologies can be invented and applied
Institutional structures that promote growth * Strong property rights * Patents + copyrights * Efficient financial institutions * Literacy + widespread education * Free trade * Competitive market system
Ingredients of economic growth * Supply factors - Changes in the physical and technical agents of production * Demand factor - To achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy’s expanding output of goods and services * Efficiency factor - To reach its full production potential, an economy must achieve economic efficiency as well as full employment
Production possibilities analysis * Increases in total spending match increases in production capacity, and the economy moves from a point on the previous production possibilities curve to a point on the expanded curve * Labor productivity - Measured as real output per hour of work * Labor-force participation rate - Percentage of the working-age population actually in the labor force
Growth accounting - System to assess the relative importance of the supply-side elements that contribute to changes in real GDP * Increases in quantity of labor + increases in labor productivity cause economic growth
Factors of productivity growth * Technological advance * Quantity of capital * Capital goods available per worker * Infrastructure - Highways and bridges, public transit systems, wastewater treatment facilities, water systems, airports, educational facilities, and so on * Education + training * Human capital - Knowledge and skills that make a worker productive * Economies of scale + resource allocation * Economies of scale - Reductions in per-unit production costs that result from increases in output levels * High productivity employment
Over long periods, the economy’s labor productivity determines its average real hourly wage
Reasons for productivity acceleration * Microchip + information technology * Information technology - Combination of the computer, fiber-optic cable, wireless technology, and the Internet * Start-up firms * Increasing returns - A given percentage increase in the amount of inputs a firm uses leads to an even larger percentage increase in the amount of output the firm produces * Network effects - Increases in the value of the product to each user, including existing users, as the total number of users rises * Learning by doing - Firms that produce new products or pioneer new ways of doing business experience increasing returns * Global competition
Is growth desirable + sustainable? * Con - Negative externalities, doesn’t solve sociological problems, unsustainable * Pro - Better living standards, improved infrastructure, reduced poverty