Transcript Economic Growth - My Teacher Pages

PART SEVEN
Economic Growth and
International Economics
Chapter 17:
Economic Growth
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Economic Growth

Economic growth is the expansion of real
GDP (or real GDP per capital) over time.

U.S. real GDP (adjusted for inflation)
increased from $1,177 billion in 1950 to
$10,842 billion in 2004.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Ingredients of Growth

Three key factors interact in a dynamic
process to ensure economic growth.
 The six main ingredients include four
supply factors, a demand factor and an
efficiency factor.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Supply Factors

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Supply factors relate to the physical ability of
the economy to expand.
Increases in the quantity and quality of
natural resources and human resources, as
well as the growth in the supply of capital
goods and improvements in technology, will
enable an economy to expand its potential
GDP.
Demand Factor

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Households, businesses, and government
demand contribute to economic growth
through the purchasing of the economy’s
expanded output of goods and services.
An increase in total spending in response to
an increase in output ensures that there will
be no unplanned inventories and resources
will remain fully employed.
Efficiency Factor
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To reach its production potential, an economy
must achieve economic efficiency as well as
full employment.
This can be done as long as the economy
achieves both productive efficiency (using
resources efficiently) and allocative efficiency
(producing products that maximize people’s
well-being).
Production Possibilities Analysis
Production possibilities analysis can help
illustrate the six factors underlying
economic growth.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Growth and
Production Possibilities

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An improvement in any
of the four supply
factors that shift the
production possibilities
curve outward, from
AB to CD.
The demand factor
and efficiency factor
will move the economy
from point a to point b.
[Insert Figure 1.2 here]
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities and
Aggregate Supply


Economic growth can also be thought of
as an expansion of an economy’s long-run
aggregate supply.
As an economy expands, the long-run
aggregate supply curve shifts to the right.

Recall that the ASLR is a vertical line, located
at the economy’s potential (full employment)
level of output.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities and
Aggregate Supply
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Inputs and Productivity


A country’s real GDP depends on the
amount of inputs and the productivity of
these inputs in any given year.
Likewise, economic growth from one year
to the next depends on increases in inputs
and increases in the inputs’ productivities.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Labor and Labor Productivity


The input of labor can be used to illustrate
the role of supply factors in economic
growth.
An increase in hours of work due to a
longer average workweek or a larger labor
force couple with in increase in labor
productivity can contribute to higher
economic growth.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Growth Accounting


Growth accounting is the bookkeeping of
the supply-side elements that contribute to
changes in real GDP.
The Council of Economic Advisers (CEA)
uses this method to assess the factors
underlying economic growth.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Accounting for Growth
Government data from the CEA shows
that economic growth in the U.S. can be
attributed to increases in the quantity of
labor and rises in labor productivity.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Accounting for Growth

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Factors that contribute to productivity
growth include technological advance,
increased physical and human capital,
economies of scale and improved
resource allocation.
Other factors such as the overall socialcultural-political environment of the U.S.
have fostered economic growth.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
The Productivity Acceleration


Between 1995 to 2004 period, the U.S.
experienced higher productivity growth
than in the 1973 to 1995 period.
Some economists say the U.S. has
achieved a New Economy, whereby
accelerated productivity growth resulted
from a significant new wave of technology
and enhanced global competition.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Reasons for Productivity
Acceleration in the New Economy

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The Microchip and Information Technology
New Start-Up Firms
Increasing Returns due to:
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More specialized inputs
Spreading of development costs
Simultaneous consumption
Network effects
Learning by doing
Global Competition
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
The Productivity Acceleration


Implicatively, stronger productivity growth
and heightened global competition lead to
higher rates of economic growth.
However, skeptics question the
permanence of long-term substantially
higher rates of productivity growth.
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Is Growth Desirable
and Sustainable?
The Antigrowth View
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Results in pollution, global warming, ozone
depletion and other environmental problems
Many sociological problems still exist such as
discrimination, poverty, homelessness
Physical and mental health of workers impaired
Speeds up degradation and exhaustion of the
earth’s resources
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Is Growth Desirable
and Sustainable?
In Defense of Economic Growth

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Higher standard of living and material
abundance
Improvements in the nation’s infrastructure
Enhanced health care
Better public safety
Safer work environment
Copyright © 2007 by the McGraw-Hill Companies, Inc. All rights reserved.