Transcript Economic Growth Parts I & II

Economic Growth Parts I & II
AP Macroeconomics
Where did we come from?

In a previous lesson,
we looked at the
relationship between
inflation and
unemployment, and
introduced something
called the Phillips
Curve.
http://sfbayhomes.com/inflation-is-real-estate-the-answer/
Where are we going?
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Today we will discuss the
main sources of long-term
economic or real GDP growth
and the policies that
governments might use to
increase economic growth.
There is a difference in the
short-term fluctuations in real
GDP that result from the
business cycle and the longrun growth in real GDP.
http://unentogs.blogspot.com/2012/01/economic-growth.html
The trend…
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Let’s talk about the longterm growth trend in the
United States.
The average growth rate
in per capita real GDP
has been above 2% per
year for the last 40 years.
At the same time, the
annual rate of growth has
fluctuated dramatically.
http://www.die.net/musings/national_debt/
How does growth occur?

Certain economic
agents must have the
appropriate incentives.
These “agents” are:
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Producers
Consumers
http://www.infiniteunknown.net/tag/consumers/
Growth accounting…
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Focuses on three sources of long-run
economic growth:
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1) The supply of labor
2) The supply of capital
3) The supply of technology
Increases in any of these leads to increases in real
GDP!
Growth in Labor Supply…
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This is mostly the
growth in the
population rate…
When the population
swells, so too does the
labor supply.
http://eplegal.com.vn/home/en/press-room/publication/124-the-new-draft-labour-code-froman-employers-perspective.html
What about capital & technology?
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Increases in capital or
in technology, as we
already know, lead to
increases in labor
productivity.
Increases in labor
productivity lead to
increases in real GDP
(especially in the longrun).
http://www.ventures-africa.com/2012/04/diary-of-an-under-30-ceo-when-capital-is-not-enough/,
http://ecologyofeducation.net/wsite/?cat=21
Think…

How does labor productivity lead to long term
economic growth? (or vice versa)
Economic Growth Part II
What now?
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We can refer to the variables of labor supply,
capital, and technology as the levers of
growth.
That’s great to know, but what about them?
We are interested in how these so called
levers of growth can be stimulated.
Let’s talk about that now.
Stimulating the Levers of Growth
There are 4 ways in which this can
be accomplished…
SAVINGS
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There are 4 ways in which this can be
accomplished:
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1) Increasing savings increases the supply of
loanable funds, decreases the interest rate, and
spurs investment.

In the United States, tax incentives is the primary
method for increasing savings (for example, through
IRAs)
RESEARCH
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There are 4 ways in
which this can be
accomplished:
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2) Increasing
government support for
basic research. This
stimulates research and
development.

http://www.oswego.edu/academics/colleges_and_departments/arts_and_sciences/stem.html
A good example? One
tool is National Science
Foundation grants.
INTERNATIONAL TRADE
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There are 4 ways in
which this can be
accomplished:
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3) Reaping as many
benefits as possible from
comparative advantage
by advocating
international trade. This
stimulates growth on a
global scale.
http://www.seraph.net/tag/international-trade/
EDUCATION
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There are 4 ways in which
this can be accomplished:
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4) Through improvement of
the condition, quality, and
capacity of the labor force
(i.e. education, training, etc.),
workers become more
productive with any given
level of capital and
technology.
Education
is a vital tool. Providing
incentives for the improvement of
education (such as education IRAs)
encourages more people to obtain an
education, which also stimulates growth.
http://www.moneynews.com/surveys/RaisingTaxes/Will-Raising-Taxes-Help-or-Hurt-America/id/61/kw/default?PROMO_CODE=10FCE-1&gclid=CLPIovPKkLQCFQU5nAodNhUA7g
RECAP?
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The government can stimulate economic
growth by encouraging, increasing,
improving, and providing incentives for four
things…
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1) Savings
2) Research
3) International Trade
4) Education/training
Connect the dots..
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Remember the PPC from
way back in Unit 1?
How do changes in the labor
force relate to the PPC?
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Answer: Increases in the labor
force and advances in
technology can be shown as
an outward shift in the PPC or
the LRAS. Both shifts
demonstrate that total output
has increased.
http://www.harpercollege.edu/mhealy/eco212i/lectures/econgrow/econgrow.htm
BOTH SHIFTS
DEMONSTRATE
THAT TOTAL
OUTPUT HAS
INCREASED!
And now…
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Some resources:
Reffonomics:
http://www.reffonomics.com/
Morton workbook: Activity 47
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.