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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

JQ

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