Chapter 25

Economic
Growth

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter Objectives
• Modern economic growth and
increasing living standards
• Growth accounting
• U.S. productivity growth
• Is growth desirable and
sustainable?

25-2
 Economic Growth
• Increase in real GDP or real GDP per
capita over some time period
• Percentage rate of growth
• Growth as a goal
• Arithmetic of growth: Rule of 70
Approximate 70
number of years
required to double
=
annual percentage rate
real GDP of growth

25-3
 Economic Growth
• Growth U.S. real GDP 1950-2005
– Increased 6 fold
– 3.5% per year
• Growth in U.S. real GDP per capita
– Increased more than 3 fold
– 2.3% per year
• Qualifications
– Improved products and services
– Added leisure
– Other impacts 25-4
 Modern Economic Growth
• Began with the Industrial Revolution
in late 1700’s
• Ongoing increases in living standards
• Time for leisure
• Social change
• Democracy
• Human lifespan doubled

25-5
 Modern Economic Growth
• Began in Britain
• Has spread slowly
• Starting date main cause of worldwide
differences in living standards
• Catching up is possible
• Leader countries invent technology
• Follower countries adopt technology
– Can grow faster
25-6
 Real GDP Per Capita
Real GDP Real GDP Average annual
per capita, per capita, growth rate,
Country 1960 2004 1960-2004

United States $12,892 $36,098 2.3%

United Kingdom 10,323 26,762 2.2
France 8,531 26,168 2.5
Ireland 5,294 28,957 3.9
Japan 4,509 24,661 3.9
Singapore 4,219 29,404 4.4
Hong Kong 3,322 29,642 5.0
South Korea 1,458 18,424 5.8

Figures are in 1996 dollars Source: Penn World Table

25-7
 Modern Economic Growth

• Growth-promoting institutional
structures
–Strong property rights
–Patents and copyrights
–Efficient financial institutions
–Literacy and widespread education
–Free trade
–Competitive market system
25-8
 Ingredients of Growth

• Supply factors
–Increases in quantity and quality
of natural resources
–Increases in quality and quantity
of human resources
–Increases in the supply (or stock)
of capital goods
–Improvements in technology

25-9
 Ingredients of Growth

• Demand factor
–Households, businesses, and
government must purchase the
economy’s expanding output
• Efficiency factor
–Must achieve economic efficiency
and full employment

25-10
 Production Possibilities
From Chapter 1:
C

A
Economic
Capital Goods

Growth

c b
a

B D
Consumer Goods
25-11
 Labor and Productivity
Real GDP = hours of work x labor productivity

• Size of
employed Labor
labor force Inputs
• Average (hours of
hours of work)
work
x Real
• Technological = GDP
advance
• Quantity of Labor
capital Productivity
• Education and (average
training output per
• Allocative hour)
efficiency
• Other

25-12
 U.S. Economic Growth
Annual Averages for Five Decades
5
Real GDP
Average Annual Increase (Percent)

Real GDP Per Capita

4

0
1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2005
Year Source: Bureau of Economic Analysis
25-13
 Accounting for Growth
Accounting for Growth of U.S. Real GDP,
1953-2013 (average annual percentage
changes)

1953 Q2 1973 Q4 1995 Q2 2001 Q1 2007 Q3

to to to to to
Item 1973 Q4 1995 Q2 2001 Q1 2007 Q3 2013 Q4*

Increases in Real GDP 3.6 2.8 3.8 2.6 2.8

Increases in
Quantity of Labor 1.1 1.3 1.4 -0.1 0.3

Increases in
Labor Productivity 2.5 1.5 2.4 2.7 2.5
*Beyond 2007 are Projections Source: Economic Report of the President, 2008

25-14
 Accounting for Growth
• Factors affecting productivity
growth
–Technological advance (40%)
–Quantity of capital (30%)
–Education and training (15%)
–Economies of scale and resource
allocation (15%)

25-15
 Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, Top 10
Countries and the United States, 2003
Mathematics Science
1 Singapore 605 1 Singapore 578
2 South Korea 589 2 Taiwan 571
3 Hong Kong 586 3 South Korea 558
4 Taiwan 585 4 Hong Kong 556
5 Japan 570 5 Estonia 552
6 Belgium 537 6 Japan 552
7 Netherlands 536 7 Hungary 543
8 Estonia 531 8 Netherlands 536
9 Hungary 529 9 United States 527
10 Malaysia 508 10 Australia 527
15 United States 504
25-16
 Productivity Growth
• Accelerated rate of growth
–1.4% per year 1973-1995
–2.9% per year 1995-2005
• Affects real output, real income,
and real wages
• Pay higher wages without
lowering profit

25-17
Accelerated Productivity Growth
• Microchip/information technology
• New firms and increasing returns
• Sources of increasing returns
–More specialized inputs
–Spreading of development costs
–Simultaneous consumption
–Network effects
–Learning by doing
• Global competition
25-18
 Economic Growth
• Is accelerated productivity growth
sustainable?
• Is economic growth desirable and
sustainable?
• The antigrowth view
– Environmental and resource issues
• In defense of economic growth
– Higher standard of living
– Human imagination can solve
environmental and resource issues
25-19
 Economic Growth in China
• Growth averages past 25 years:
– 9% annual growth output
– 8% annual growth output per capita
• Labor more productive
• More international trade
• Transition to market economy
• Joined WTO 2001
• Financial system remains weak
• Income inequality across geographic
areas
25-20