LO1 25-1 AGENDA Mon 2/1 QOD #9: New Zombie GDP Review HW (CH 25 Q# 1-4 P #1) Economic Growth HW: Read pp 512-523 Q #9-10
LO1 25-2 QOD #9: New Zombie GDP Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked. What is New Zombie s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10 per hour, what is New Zombie s rate of economic growth?
LO1 25-3 QOD #9: New Zombie GDP Solution New Zombie s real GDP in year 1 is $1600 (= 200 x $8) GDP in year 2 is $2100 (= 210 x $10). The rate of growth (assuming constant prices) is 31.25 percent (= [2100 1600] / 1600).
LO1 25-4 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 number of years required to double real GDP = 70 annual percentage rate of growth
LO1 25-5 Economic Growth Growth in U.S. real GDP 1950-2009 Increased 6 fold 3.2% per year Growth in U.S. real GDP per capita Increased more than 3 fold 2% per year Qualifications Improved products and services Added leisure Other impacts-environment, quality of life
LO2 25-6 Modern Economic Growth Began with the Industrial Revolution in late 1700s Ongoing increases in living standards Time for leisure Social change-education, social status, women Democracy Human lifespan doubled
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 LO2 25-7
LO2 25-8 Modern Economic Growth Real GDP Real GDP Average annual per capita, per capita, growth rate, Country 1960 2007 1960-2007 United States $ 14,766 $42,887 2.3% United Kingdom 11,257 32,181 2.3 France 9,347 29,663 2.5 Ireland 6,666 41,625 4.0 Japan 5,473 30,585 3.7 Singapore 4,149 44,619 5.2 Hong Kong 3,849 43,121 5.3 South Korea 1,765 23,850 5.7 Figures are in 2005 dollars Source: Penn World Table version 6.3, pwt.econ.upenn.edu
Modern Economic Growth LO3 25-9
Institutional Structures of Growth Strong property rights Patents and copyrights Efficient financial institutions-banks Literacy and widespread education Free trade-specialization, new ideas, but also movement of jobs Competitive market systemeconomic and political freedom, regulation, hard work, immigration LO3 25-10
LO3 25-11 Determinants 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 Demand factor Households, businesses, and government must purchase the economy s expanding output Efficiency factor Must achieve economic efficiency and full employment
LO3 25-12 Accounting for Growth Real GDP= hours of work x labor productivity Factors affecting productivity growth Technological advance (40%) New prod. Techniques, managerial methods, improved processes Quantity of capital (30%) Saving and investing in new plant and equipment Education and training (15%) Human capital-the knowledge and skill that make a worker productive Mixed bag-more college educated but we re behind many other nations in science and math. Economies of scale and resource allocation (15%)
Productivity Growth Average rate of growth 1.5% per year 1973-1995 2.8% per year 1995-2009 Affects real output, real income, and real wages Pay higher wages without lowering profit-is that really what s happened? LO4 25-13
LO4 25-14 Productivity Growth Microchip/information technology New firms and increasing returns Sources of increasing returns More specialized inputs-inventory management systems, accounting, marketing Spreading of development costs-over MORE units Simultaneous consumption-e-books, software programdeveloped once and cheap to reproduce Network effects-interconnectivity-facebook, Gmail Network effect-magnifies the value of the output. Learning by doing Global competition-trade deals, increased capitalism Allowed businesses to expand beyond national borders
LO5 Economic Growth Is economic growth desirable and sustainable? Macroeconomist Robert Gordon-The Death of Innovation The antigrowth view Environmental and resource issues Growth doesn t solve issues such as poverty, income inequality Productivity but wage don t keep up. In defense of economic growth Higher standard of living Growth can improve infrastructure, increase household incomes Human imagination can solve environmental and resource issues
Economic Growth Growth is the path to greater material abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge LO5 25-16
Global Perspective LO5 25-17