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