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