Chapter 12: Economic Growth

1
Chapter 12 Economic Growth
2
Economic Growth

• Rate percentage change in Real GDP over the
  previous year. In 1992 prices,
• Real GDP has grown from 2.3 trillion in 1960 to
  8.9 trillion in 1999 (average annual growth rate
  of 3.4)
• Real GDP is expected to reach about 17 trillion
  in 2020 (at an average annual growth rate of 3.3)

3
Economic Growth

• Real GDP growth rate averaged 3.4 in 1960-1999
• Negative in 1970, 1974-75, 1980, 1982, 1991
• Over 3 in 1964-67, 1968, 1972-73, 1976-78,
  1983-85, 1988-89, 1995-97

4
Business Cycles

• Short-run fluctuations of the Real GDP along the
  path of long-term growth, consisting of
• Expansion or Recovery
• Peak or Boom
• Contraction or Recession
• Trough or Depression

5
Business Cycle
Real GDP
Path of long-term growth
Peak
Expansion
Recession
Trough
Time
6
Identifying Business Cycle

• The Index of Leading Economic Indicators
  identifies the turning points of business cycles.
  It provides information about the state of the
  economy 4 to 6 months ahead.
• The Index of Leading Economic Indicators includes
• stock market prices, real money supply, consumer
  expectations, interest rate, manufacturing
  workweek, unemployment claims, building permits,
  consumer capital goods order, inputs delivery
  performance

7
Theories of Business Cycle

• Expectations business optimism pessimism
• Innovations risk-taking for monopoly profit
• Inventory inventory adjustment lag
• Real fluctuations of long-run actual along
  potential GDP
• Exogenous outside events shocks

8
Economic Resources

• Human or Labor physical mental efforts of
  workers in production of goods services
• Capital goods used in production of other goods
  (e.g., tools, equipment, buildings)
• Natural gifts of the nature (e.g., water,
  minerals)

9
Determinants of Growth

• Availability of resources human, capital,
  natural
• Human capital investment education, skills
• Physical capital investment
• Technological advancement
• Social capital investment infrastructure
• Efficient and democratic government
• International relations

10
Economic Growth
Good y
Economic growth is illustrated by an outward
shift of the PPC
B
90
A
60
Good x
100
72
11
Reasons for Growth Slowdown

• Labor Force
• Need education and on-the-job-training
• Have part-time or temporary jobs
• Saving and Investment
• Low saving ratio about 15 of GDP
• Slow capital accumulation

12
Reasons for Growth Slowdown

• Composition of Output
• Shift of resources from high-productivity capital
  goods to low-productivity consumer goods
• Government
• Stringent regulations
• Large and growing public debt