Economic Growth

1
Economic Growth

• Unit 5 Lesson 4 Activity 47
• Sunders, Philip. Introduction to Macroeconomics
  Student Workbook. 18th ed. Bloomington. IN
  1998
• Advanced Placement Economics Teacher Resource
  Manual. National Council on Economic Education,
  New York, N.Y

2
Objectives

• Describe long-term growth trends In the United
  States
• Explain growth accounting
• Explain that growth accounting shows that to
  achieve increased economic growth, economies must
  increase the growth, economies must increase
  growth rate of capital stock or increase
  technological development.
• Explain how policy can help achieve increases in
  the growth rate of the capital stock and
  increases in technology development.
• Relate economic growth to the long-run aggregate
  supply curve and the production possibilities
  curve.

3
Introduction

• In this lesson, you will learn the main sources
  of long-term economic or real GDP growth and the
  policies that governments might use to increase
  economic growth.
• You should be aware that there is a difference
  between the short-term fluctuations in real GDP
  that result from the business cycle and the
  long-run growth in real GDP discussed in this
  lesson.

4

• The average growth rate in per capita real GDP
  has been about 2 a year for the last four
  decades.
• However, the annual rate of growth has varied
  considerable during this same periods.
• The increase in the average standard of living
  represented by the increase in per capita real
  GDP is important.
• The distribution of the increase in real GDP is
  also important.

5

• In order for growth to occur, economic agents
  producers and consumers must have the
  appropriate incentives.
• Growth accounting focuses on three sources of
  long-run economic growth
• Supply of labor
• Supply of capital
• Level of technology
• Increases in any one of these elements will
  increase real GDP.
• The growth in the supply of labor is primarily
  the population growth rate.
• Increase in capital or in technology increase
  labor productivity and thus increase real GDP.

6
Activity 47 Economic Growth and the Determinants
of Productive Capacity

• The limit of an economys ability to produce real
  goods and services is set by the quantity an
  quality of its basic productive resources and
  technology.
• At any given moment, an economys total
  productive capacity may be fixed, but over time
  an economy can increase (or decrease) its
  capacity to produce real goods and services by
  increasing (or decreasing) the quantity and/or
  the quality of its productive resources.
• An economys productive resources can be
  classified in several different ways. Some of
  our resources are physical or tangible
• things that we can see, count, weigh or measure.

7

• Other resources that are useful in the production
  process are intangible.
• Intangible resources are more difficult to
  identify and measure, but no less important than
  tangible resources.
• At any given time, an economys productive
  capacity is determined by the quantity and
  quality of its
• Human Resources labor resources, but not all
  labor is equal. Different people have different
  skills, based on their investment in human
  capital. Human capital (education and skill
  level) and entrepreneurship are difficult to
  measure.

8

• Natural Resources the gifts of nature that are
  useful in producing goods and services. There
  are fixed, exhaustible and renewable natural
  resources.
• Capital Goods the plant, equipment and machinery
  needed to make other goods and services
• Technological Progress when production becomes
  more efficient, producing more output without
  using any more inputs additional capital or
  labor
• Public Policy the basic social, economic, legal
  and political values and institutions supported
  by a society that either aid or hinder efficient
  markets and the production of goods and services.

9

• In practice, economic growth is usually measured
  by changes in real GDP or, better still, changes
  in real GDP per capita gross domestic product
  per person adjusted for changes in prices.
• The rate of economic growth is the average annual
  percentage change in real GDP per capita.
• Economists use real GDP per capita to measure
  living standards across time and between
  countries.

10

• To summarize, economic growth occurs because an
  economy experiences technical progress, increased
  investments in physical capital and increased
  investments in human capital.
• In the most fundamental sense, economic growth is
  concerned with increasing an economys total
  productive capacity at full employment.

11

• Part A Measuring Economic Growth in Hamilton
  Country and Jefferson County

1. Using Fig. 47.1 as a reference, fill out the
   table in Fig. 47.2 thru 47.4

Hamilton Real GDP
Jefferson Real GDP
Jefferson Population
Hamilton Population
Year
1 2.1 billion 70,000 500,000 15
2 2.5 billion 80,000 525,000 16
3 2.8 billion 90,000 600,000 17
4 2.7 billion 86,000 650,000 18
12

• Fig. 47.2

Hamilton Change in Real GDP
Jefferson Change in Real GDP
Note (Year Base Yr / Base Yr)
From Year 1 to Year 2    
From Year 2 to Year 3    
From Year 3 to Year4    
525,000 500,000 25,000/500,000 5
2.5 2.1 4 4 / 2.1 19
600,000 525,000 75,000/525,000 14.3
2.8 2.5 3 3 / 2.5 12
650,000 600,000 50,000/600,000 8.3
2.7 2.8 -0.1 -0.1 / 2.8 -3.6
13
Fig. 47.3
Note (Real GDP/Population Per Capita Real
GDP)
Hamilton Per Capita Real GDP
Jefferson Per Capita Real GDP
2.1 billion / 70,000 30,000
1    
2    
3    
4    
500,000 / 15 33,333.33
2.5 billion / 80,000 31,250
525,000 / 16 32,812.50
2.8 billion / 90,000 31,111
600,000 / 17 35,294.12
2.7 billion / 86,000 31,395
650,000 / 18 36,111.11
14
Fig. 47.4
Hamilton Change in Per Capita Real GDP
Jefferson Change in Per Capita Real GDP
Note (Year Base Yr / Base Yr)
From Year 1 to Year 2    
From Year 2 to Year 3    
From Year 3 to Year4    
31,250 30,000 1,250/30,000 4.17
32,812.50 33,333.33 -520.83/ 33,333.33
-1.6
35,294.12 32,812.50 2481.64/ 32,812.50
-7.56
31,111 31,250 -139 /31,250 -0.44
31,395 31,111 284 / 31,111 -0.91
36,111.11 35,294.12 816.99/ 35,294.12
-2.31
15

• When did Hamilton County experience the largest
  growth in real GDP? _____________________________
• In per capita GDP? _______________
• Are these growth rates different? Explain.

From Yr. 1 to Yr. 2
From Yr. 1 to Yr. 2
Both increased the most from Yr. 1 to Yr. 2.
However, per capita real GDP increased by less
than real GDP because of population growth.
16

• When did Jefferson County experience the largest
  growth in real GDP? ___________________
• In per capita GDP? _____________
• Are these growth rates different? Explain.

From Yr. 2 to Yr. 3
From Yr. 2 to Yr. 3
The per capita growth rate is smaller than the
GDP growth rate because the population has
increased.
17

• The residents of Hamilton country believe they
  live in a wealthier community than small rural
  Jefferson County. Based on these numbers, do
  they? Explain.

No. Real GDP per capita is larger in Jefferson
County than in Hamilton County.
18
Levels of Growth

• How can these levels of growth be stimulated?
• Increasing savings will increase the supply of
  loanable funds, decrease interest rates and spur
  investment or increases in the capital stock.
• In the United States, tax incentives are the
  principal method to increase savings.
• IRAs and Roth IRAs are examples.
• During the 1970s and 1980s, stockholders in gas
  and electric utility companies received a tax
  break if they reinvested their dividends in the
  companies.

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• How can these levels of growth be stimulated?
• Increasing government support for basic research
  will stimulate research and development.
• National Science Foundation grants are one
  mechanism used in the United States
• Getting the most from comparative advantage by
  encouraging international trade will also
  stimulate growth throughout the world.

20

• How can these levels of growth be stimulated?
• Growth can also be stimulated by improving the
  quality and capabilities of the labor force so
  workers can be more productive with a given level
  of capital and technology.
• Improving the quality of public education and,
  using education IRAs, provides incentives for
  people to obtain more education.

21

• Increases in the labor force and advances in
  technology can be shown as an outward shift in
  PPC or as an outward shift in the LRAS.
• Both shifts demonstrate that total output has
  increased.

PPC
LRAS
LRAS1
10


8
Price Level

6
Crusts

4
2

0
4
3
2
1
Y
Real GDP
Y1
Pastries
22

• Part B Analyzing the Reasons for Economic Growth
• Economic growth can be illustrated by a
  rightward shift of the long-run AS curve or a
  shift outward of the production possibilities
  curve of consumption goods vs. capital goods.
• Draw a graph that includes AD, SRAS and LRAS and
  then draw a graph of PPC.

23

• Fig. 47.5 Relationship Between LRAS and PPC
  Increased Investment in Education

Capital Goods
PL
LRAS
SRAS
p
AD
PPC
Real GDP
Consumption Goods
24

1. On each graph you drew, show the effect of an
   increased investment in education that makes the
   work force more productive. Explain your
   reasoning.

Both LRAS and SRAS increase. The PPC shits
outward. The increase in education makes the
labor force more productive with the same natural
resources. This means that workers can produce
more, thus increasing GDP
Capital Goods
PL
LRAS
LRAS1
SRAS
PPC1
SRAS1
p
p1
AD
PPC
Real GDP
C Goods
25

• Of the five factors that affect economic growth,
  which factor is increased by this investment
  education?

Human resources or human capital

1. Explain how fewer government regulations will
   affect economic growth. Cite an example to
   support your explanation. Show the effect of
   fewer government regulations on the graphs in
   Fig. 47.6

26
A reduction in government regulation will
reduce-the-cost of production for firms. This
will result in an increase in production at every
price level, causing increases in SRAS and LRAS.
The PPC curve will shift outward. Examples are a
decrease in regulations of environmental
pollution or a reduction in the required testing
for new drugs.
Capital Goods
PL
LRAS
LRAS1
SRAS
PPC1
SRAS1
p
p1
AD
PPC
Real GDP
C Goods
27

• Briefly explain how the following policies will
  affect economic growth and why.
• (A) High taxes on businesses
• (B) Improvements in technology

Economic growth would decrease because firms have
fewer resources to invest in producing more
products or in providing educational
opportunities for employees.
Economic growth should increase. Firms should be
able to produce more with fewer resources.
28

1. Less savings by people who want to enjoy the good
   life
2. Higher productivity of labor because of improved
   management styles
3. Lower interest rates

Consumption expenditures increase, reducing the
level of capital goods thus, future production
is reduced.
Economic growth would increase because labor can
produce more with the same inputs.
Lower interest rates sustained over time will
encourage investment, which will increase the
capital stock, and encourage people to invest in
education.