Economic Growth

1
Economic Growth

• Chapter 17

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Introduction

• Two definitions of economic growth (from Chapter
  8)
• The increase in real GDP, which occurs over a
  period of time.
• The increase in real GDP per capita, which occurs
  over time
• This definition is superior if comparison of
  living standards is desired

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Introduction

• Growth has been impressive in capitalist
  countries during the past half century. Real GDP
  in the U.S. increased by 450 percent.
• This chapter explores economic growth in more
  depth than Chapter 8.

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Six Main Ingredients of Growth

• Four supply factors relate to the ability to
  grow.
• The quantity and quality of natural resources
• The quantity and quality of human resources
• The supply or stock of capital goods
• Technology

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Six Main Ingredients of Growth

• Demand and Efficiency factors are also related to
  growth
• Demand - Aggregate demand must increase for
  production to expand
• Efficiency - Full employment of resources and
  both productive and allocative efficiency are
  necessary to ge the maximum amount of production
  possible

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Production Possibilities Analysis

• Growth can be illustrated with a production
  possibilities curve, where growth is indicated as
  an outward shift of the curve from AB to CD.
• Aggregate Demand must increase to sustain full
  employment at each new level of production
  possible.
• Additional resources that shift the curve outward
  must be employed efficiently to make the maximum
  possible contribution to domestic output

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Growth Illustrated
.
.
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Capital Goods
?
PPC
PPC1
?
Consumer Goods
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Production Possibilities Analysis

• For the economy to achieve the maximum increase
  in value, the optimal combination of goods must
  be achieved (allocative efficiency)
• Focus on the supply side is where growth depends
  on labor inputs multiplied by labor productivity.

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Growth Illustrated
SRAS
LRAS
PL
P
AD
GDPR
YF
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Growth Illustrated
LRAS
PL
SRAS
P
AD
GDPR
YF
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Production Possibilities Analysis

• Increased labor inputs depend on size of
  population and labor force participation rate
  (the percent of population actually in the labor
  force).
• Productivity is determined by technological
  progress, the availability of capital goods,
  quality of labor itself, and efficiency with
  which inputs are allocated, combined, and managed.

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Growth Records of the U.S.

• In the last four years of the 20th century, U.S.
  economic growth surged and averaged more than 4
  per year.
• But the arithmetic needs to be qualified
• Growth doesnt measure quality improvements
• Growth doesnt measure increased leisure time
• Growth doesnt take into account adverse effects
  on the environment.
• International comparisons are useful in
  evaluating U.S. performance.
• For example, Japan has grown more than twice as
  fast as the U.S. since 1948, but less in the past
  decade.

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Economic Growth

• Accounting for growth is an attempt to quantify
  factors contributing to economic growth.
• More labor input is one source of growth.
• The labor force has grown by about 2 million
  workers per year for past 25 years and accounts
  for about 1/3 of total growth
• Technological advance, the most important factor,
  has been estimated to contribute to about 26 of
  U.S. growth record since 1929

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Economic Growth

• Increases in quantity of capital are estimated to
  have contributed 18 to economic growth in the
  U.S. since 1929.
• Education and training improve the quality of
  labor.
• Improved resource allocation and economies of
  scale also contribute to growth and explain about
  12 of total growth

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Economic Growth

• Improved resource allocation has occurred as
  discrimination disappears and labor moves where
  it is most productive, and as tariffs and other
  trade barriers are lowered.
• Economies of scale occur as the size of markets
  and firms that serve them have grown.

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Other factors influence growth and are more
difficult to measure

• The social and cultural environment and political
  stability are growth friendly in the U.S.
• Respect for material success provides incentive
  to increase incomes.
• The market system rewards actions that increase
  output.
• Property rights and the legal system encourage
  growth.

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Hindrances to Growth

• Economic and Political Instability
• High inflationary expectations
• Lack of Savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding Out of Investment
• Government deficits debt increasing long term
  interest rates!
• Trade Barriers

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The Productivity Acceleration A New Economy

• Improvement in standard of living is linked to
  labor productivity output per worker per hour.
• The U.S. is experiencing a resurgence of
  productivity growth based on innovations in
  computers and communications
• Much of the recent improvement in productivity is
  due to new economy factors.

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The Productivity Acceleration A New Economy

• Microchips and information technology are the
  basis for improved productivity.
• Many new inventions are based on microchip
  technology
• New firms and increasing returns characterize the
  new economy
• Some of todays most successful firms didnt
  exist 25 years ago Dell, Microsoft, Yahoo, and
  Amazon.com

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The Productivity Acceleration A New Economy

• Sources of increasing returns include
• More specialized inputs
• The ability to spread development costs over
  large output quantities since marginal costs are
  low
• Simultaneous consumption by many customers
• Network effects make widespread use of
  information goods more valuable as more people
  use the products.

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The Productivity Acceleration A New Economy

• Global competition encourages innovation and
  efficiency
• Macroeconomic outcomes include increases in
  Aggregate supply (shift to right)
• Faster growth without inflation is possible with
  higher productivity
• Federal revenues increase with economic growth
• Skepticism about long-term continued growth
  remains , and only time will tell.

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Is Higher Growth Desirable and Sustainable

• An antigrowth view exists
• Growth causes pollution and other problems
• More is not always better if it means dead-end
  jobs, burnout, and alienation from ones job
• High growth creates high stress

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Population

• An Essay on The Principle of Population (1798)
• Population growth will outpace agricultural
  growth and this will lead to chaos.
• The Population Bomb by Paul Ehrlich (1968)
• Does Food Security stability?
• Can the Earths population maintain at the
  current level? What is the maximum?
• Current World Population?

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Is Higher Growth Desirable and Sustainable

• Others argue in defense of growth
• Growth leads to an improved standard of living
• Growth helps to reduce poverty in poor countries
• Growth has improved working conditions
• Growth allows more leisure and less alienation
  from work

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Is Higher Growth Desirable and Sustainable

• Environmental concerns are important, but growth
  actually has allowed more sensitivity to
  environmental concerns and the ability to deal
  with them.

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Is Growth Sustainable?

• Proponents of growth say Yes to growth
• Resource prices are not rising
• Growth today has more to do with expansion and
  application of knowledge and information, so is
  limited only by human imagination.

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NYT Op-Ed

• Nobody knows how many people the planet could
  theoretically hold.
• The UN predicted that fertility would decline and
  longevity would increase until the global
  population stabilized at nine billion in 2300.
• Some optimists have argued that the planet could
  support 1,000 billion.

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Green Revolution

• Father of Green Revolution Norman Borlaug
• Creation of hardy, high-yield, hybrid seeds
• Improved and increased irrigation practices
• Fertilizers and pesticides
• Land/soil management techniques
• Is it sustainable? Do we rely too much on oil?
  Does it need to be more organic or is that
  western and elitist?

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Future of Agriculture Vertical Farms
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Last Word

• There has been an increase in the number of women
  who are working.
• This has had the effect of shifting the
  production possibilities curve outward
• Whereas 40 of the women worked in 1965, 60 of
  the women are now working part time or full time.

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Last Word

• There are a number of reasons for this change
• An increase in womens wage rates
• Greater access to jobs
• Changes in preferences and attitudes
• Declining birth rates
• Increasing divorce rates
• Slower growth in male wages