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

\