Macroeconomics Chapter 8

8.1 Economic Growth

Definition of Economic Growth

Economic growth is defined as:

  • An increase in real GDP (Gross Domestic Product) over a specific period of time, which indicates an improvement in the economy's overall production capacity.

  • An increase in real GDP per capita, calculated using the formula:Real GDP per capita = Real GDP / Population.

  • Economic growth is commonly measured as a percentage rate over quarterly or annual periods.

Real GDP Growth Calculation

Example:

  • Real GDP of Canada in 2018: $2078.3 billion

  • Real GDP of Canada in 2019: $2115.3 billion

Economic Growth Rate for 2019:Percent Change = [(2019 GDP - 2018 GDP) / 2018 GDP] × 100= [(2115.3 - 2078.3) / 2078.3] × 100 = 1.8%

Real GDP Per Capita Growth Calculation

Example:

  • Real GDP in Canada in 2018: $2078.3 billion

  • Population in 2018: 37.1 million

  • Real GDP per capita in 2018: $56,018

  • Real GDP per capita in 2019: $56,710

Growth Rate:= [(56,710 - 56,018) / 56,018] × 100 = 1.2%

8.2 Modern Economic Growth

Historical Context

Before the Industrial Revolution (late 1700s), living standards across most societies remained relatively stagnant over long periods, with minimal economic mobility. The advent of the Industrial Revolution bore significant changes that propelled economic activities, resulting in sustained increases in real GDP per capita over the last 250 years.

Cultural, Social, and Political Effects

  • Culturally: Economic growth has led to increased leisure time, allowing societies to engage more in arts, entertainment, and recreational activities, which have enriched cultural diversity.

  • Socially: Growth facilitated the establishment of universal public education systems, a rise in literacy rates, and a broad shift in social norms regarding gender and minority employment, promoting inclusive workforce participation.

  • Politically: As economies experience consistent growth, there tends to be a gradual movement towards democratic governance, as economic stability often correlates with demands for better representation and rights.

Uneven Distribution of Growth

Economic growth initially spread from Britain to France, Germany, and other parts of Europe in the 19th century, eventually reaching Canada and the United States. However, regions such as Central and South America and various parts of Africa have only recently begun to experience sustainable economic growth.

8.3 Determinants of Growth

Six Ingredients of Economic Growth

  1. Supply Factors:

    • Increased quantity and quality of natural resources available for use.

    • Enhanced human resources, focusing on education and skill acquisition.

    • Increased capital goods, such as machinery and infrastructure necessary for production.

    • Technological improvements that boost efficiency and productivity.

  2. Demand Factor:

    • It's crucial for the increase in production capacity to align with aggregate demand to prevent overproduction and unplanned inventory surpluses.

  3. Efficiency Factor:

    • Resource efficiency is key; ensuring effective combinations of economic resources (productive and allocative efficiency) helps achieve optimal output levels.

Labour and Productivity

Economic output can be enhanced either by increasing the quantity of labor resources or by improving labor productivity. Formula:Real GDP = Worker-Hours x Labour ProductivityChange in GDP = Change in Worker-Hours + Change in ProductivityFactors impacting productivity include:

  • Technological advances

  • Investments in capital and infrastructure

  • Enhanced education and training initiatives

  • Workforce skills development

8.4 Accounting for Growth in Canada

Recent Performance

Canada's output growth has generally exceeded the increases in labor and capital due to significant shifts towards higher productivity jobs and enhancements in multifactor productivity (MFP).

Key Factors of Growth:

  • Quantity of labor available for work

  • Technological advances, which have been the largest contributor to productivity

  • Significant capital investments in various industries

  • Ongoing education and training programs to improve workforce capabilities

Recent Fluctuations in Productivity

For decades, Canadian productivity has averaged under 1% from the mid-1970s to 2017, lagging behind the US average of 1.5%.

8.5 Recent Economic Trends

Productivity Growth Factors (1989-2000)

  • Technological advancements, particularly the development of microchips, have revolutionized productivity measurements.

  • The increase of specialized inputs and the spread of development costs across larger production scales.

  • Network effects and the adoption of learning-by-doing strategies have significantly contributed to overall productivity growth.

Global Competitiveness Index

The Global Competitiveness Index assesses a country's potential for economic growth based on various qualitative and quantitative factors, ranking Canada 14th in 2019, which indicates a relatively competitive economic landscape.

8.6 Sustainability of Economic Growth

Anti-Growth View

There are critical concerns regarding the environmental impacts of economic growth, including pollution and socio-economic imbalances. Critics argue that growth has not resolved key issues affecting the quality of life.

Defense of Growth

Proponents of economic growth counter that it leads to enhanced living standards without making labor conditions hazardous. Growth is proposed to foster societies' capacity to adapt sustainably through advancements in knowledge and innovation, promoting a balance between development and ecological preservation.

Women in the Labour Force

Labour Trends

The percentage of Canadian women engaged in paid employment has increased from 25% in 1960 to over 60% today, reflecting a significant shift in socio-economic participation.

Current Statistics:

  • Women now constitute approximately 48% of Canada's workforce.

  • Key factors contributing to this increase include:

    • Improved education and training opportunities

    • Changes in lifestyle choices and access to reliable birth control

    • Greater access to diverse job opportunities across various sectors.

Gender Pay Gap: It remains a challenge as women earn, on average, 87 cents for every dollar earned by men, highlighting the need for continued attention to equity and fairness in the labor market.