Chapter 26: Economic Growth

Consider This: Economic Growth Rates Matter

Even a percentage point difference in economic growth rates matter because of the rule of 70.

Other Factors for Sustaining Modern Economic Growth

stable political system and positive social or cultural attitudes toward work and risk taking.

Economic model

A familiar ____________ can be used for the analysis of economic growth.

Production possibilities model

In this economic model, economic growth shifts this particular model's curve outward because of improvement in supply factors. Whether the economy operates on the frontier of the curve or inside the curve depends on the demand and efficiency factors.

Supply factors

Increase the output potential of the economy.

Human capital

Increased investment in ________________, also known as the training and education of workers) has expanded the productivity of workers, and has accounted for about 15% of productivity growth.

Productivity growth

Is characterized by advances in technology, more entrepreneurship, increasing returns from resource inputs, and greater global competition.

Modern Economic Growth

It began with the invention of the steam engine in 1776 and the Industrial Revolution that followed it.

Quantity of capital

It has expanded with the increase in saving and investment spending in capital goods. This private investment has increased the quantity of each worker's tools, equipment and machinery. Public investment: infrastructure. It accounted for about 30% of productivity growth.

Technological advance

It is combining given amounts of resources in new and innovative ways that result in a larger output. It involves the use of managerial methods and business organizations that improve production. It is also embodied in new capital investment that adds to the productive capacity of the economy. It accounted for about 40% of the recent increase in productivity growth.

Economies of scale

Means that there are reductions in the per-unit cost for firms as output expands. These occur as the market for products expands and firms have the opportunity to increase output to meet this greater demand. (Accounted for around 7.5% of the productivity growth)

Five Factors of Labor Productivity

Technological advances, the expansion of the stock of capital goods, the improved education and training of its labor force, economies of scale, and the reallocation of resources.

Is more economic growth desirable and sustainable?

The antigrowth view is based on the environmental problems it creates, its effects on human values, and doubts about whether growth can be sustained. The defense of growth is based in part on its contribution to higher standards of living, improvements in worker safety and the environment, and history of sustainability.

Rule of 70

The approximate number of years required to double GDP can be calculated by this rule, which involves dividing 70 by the annual percentage rate of growth.

Economic growth

The economic health of a nation relies on _____________________ because it reduces the burden of scarcity. Small differences in real growth rates result in large differences in standard of living in nations.

Consider This: Women, the Labor Force and Economic Growth

The increased number of women working, improved education and productivity, and more efficient employment contributed to U.S. economic growth over the past 50 years.

Labor force participation rate

The percentage of the working age population (15-64) in the labor force.

Important factors in growth accounting

The two main factors are a. increases in quantity of labor (hours of work) and increases in labor productivity. b. technological advance c. increase in quantity of capital d. increase in human capital e. economies of scale and improved allocation of resources.

Institutional Structures in leader countries

These structures involve establishing strong property rights, protecting patents and copyrights, maintaining efficient financial institutions, providing widespread education, advocating free trade among nations, and using a system of markets and prices to allocate scarce resources.

Follower countries

They are often missing one of more of the institutional features that leader countries bear.

Follower countries

They can have a faster growth rate because they simply adopt the existing technologies and apply them to the country, thereby skipping the lengthy process of technological development of the leader countries.

Determinants of growth

They depend on supply, demand, and efficiency factors. 1. Supply factors 2. Demand factor 3. Efficiency factor 4. Economic model

Supply factors

They include the quantity and quality of resources (natural, human and capital) and technology.

Institutional structures

They increase saving and investment, develop new technologies, and promote more efficient allocation of resources. 1. Strong support of property rights. 2. The use of patents and copyrights. 3. Efficient financial institutions 4. Widespread education and literacy. 5. Free trade 6. A competitive market system.

Leader countries

They must invent and implement new technology to grow their economies, but such a process means the growth rates in leader nations will be slow.

Efficiency factor

This affects the efficient use of resources to obtain maximum production of goods and services (productive efficiency) and to allocate them to their highest and best use by society (allocative efficiency)

Demand factor

This influences the level of aggregate demand in the economy that is important for sustaining full employment of resources.

Improved allocation of resources

This occurs when workers are shifted from lower-productivity employment to higher-productivity employment in an economy. Included in this category would be reductions in discrimination in labor markets and reduced barriers to trade, both of which increase the efficient use of labor resources.

Last Word: Can Economic Growth Survive Population Decline?

As nations experience population decline, there can be a loss in work hours that must be offset by an increase in productivity if a nation is to maintain its level of real GDP.

Modern economic growth

Can be described as an improvement in living standards that is continual and sustained over time. The result is a substantial improvement in the standard of living in less than a human lifetime.

Labor productivity

Defined as real output per work hour). Determined by many factors such as technological advance, the quantity of capital goods, the quality of labor, and the efficiency in the use of inputs.

Economic growth

Defined in two ways: as an increase in real GDP over some time period or as an increase in real GDP per capita over some time period.

Economy with fully employment and full production

Depends upon two factors: the level of aggregate demand (the demand factor) and the efficiency with which the economy allocates resources (the efficiency factor)

Hours of work

Determined by the size of the working-age population and the labor-force participation rate.

Shortcomings of Growth record

Does not take into account improvements in product quality or increases in leisure time. The effects of growth on the environment or quality of life could be negative or positive.

Growth accounting

Economic growth in the United States depends on the increase in the size of its labor force and on the increase in labor productivity.

Economic Growth focused on supply factors

Economic growth is obtained by increasing the labor inputs and by increasing the labor productivity. Real GDP = Worker-hours x Labor productivity.

Consider This: Patents and Innovations

Without patent protections, pharmaceutical companies have little incentive to develop new drugs because the profit from the few successful ones must cover the losses from all the many unsuccessful ones.

Factors for the rise in the average rate of productivity growth

1. There as been a dramatic rise in entrepreneurship and innovation based on the microchip and information technology. 2. The new start-up firms often experience increasing returns, which means a firm's output increase by a larger percentage than the increase in its resource inputs. These increasing returns have been achieved by more specialized inputs, the spreading of development costs, simultaneous consumption, network effects, and learning by doing. 3. The new technology and improvements in communication have increased global competition, thus lowering production costs, restraining price increases, and stimulating innovation to remain competitive.