Economic Growth and GDP

• Economic growth is defined and measured as either:
• An increase in real GDP over a time period.
• An increase in real GDP per capita over a time period.
• Economic growth is calculated as a percentage rate of growth per quarter or per year.
• The rate of economic growth in the United States for 2007 was 2.2 percent.
• Real GDP per capita is found by dividing real GDP by the population size.
• In 2007 the rate of growth of GDP per capita for 2007 was 1.4 percent.
• Growth rates reported in the news and by international agencies use the real GDP definition of economic growth, for measuring expansion of military potential or political preeminence.
• The second definition of economic growth is superior when comparing living standards.
• Growth as a Goal is widely held and results in rising real wages, incomes and thus higher standards of living.
• A growing economy can better meet people's wants and resolve socioeconomic problems.
• Economic growth lessens the burden of scarcity and enables a nation to attain its economic goals more readily.
• For the United States (with a GDP of about $13.8 trillion), the difference between a 3% and a 4% rate of growth is about $138 billion of output per year.
• The Rule of 70 tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70.
• The Rule of 70 is applicable generally for estimating how long it will take the price level or a savings account to double at various percentage rates of inflation or interest.
• When compounded over many years, an apparently small difference in the rate of growth becomes highly significant.
• Suppose China grows at an 8 percent yearly rate, their GDP would double in about 9 years.
• While Italy grows at 2 percent yearly rate, their GDP would double in 35 years.
• Between 1950 and 2007 real GDP increased about sixfold in the United States.
• Real GDP per capita rose more than threefold over these years.
• Real GDP grew at an annual rate of about 3.5 percent between 1950 and 2007 in the US.
• Real GDP per capita increased 2.3 percent per year over that time in the US.
• The increases in real GDP and per capita GDP were accomplished despite increases in leisure
• These measures of growth do not account for any effects growth may have had on the environment and the quality of life.
• U.S. growth rates are not constant or smooth over time.
• Many countries share the U.S. experience of positive and ongoing economic growth.

Modern Economic Growth and Uneven Distribution

• Sustained increases in living standards are a recent phenomenon that started with the Industrial Revolution of the late 1700s.
• By contrast, our current era of modern economic growth is characterized by sustained and ongoing increases in living standards.
• Economic historians informally date the start of the Industrial Revolution to the year 1776, when James Watt perfected a powerful and efficient steam engine.
• New technologies, products, and services have emerged due to modern economic growth
• Modern economic growth has vastly affected cultural, social, and political arrangements that allowed ordinary people for the first time in history to have significant time for leisure activities and the arts.
• Countries experiencing modern economic growth have abolished feudalism, instituted universal public education, and largely eliminated ancient social norms and legal restrictions against women and minorities.
• Countries experiencing modern economic growth have tended to move toward democracy, and the average human lifespan has more than doubled.
• Modern economic growth has spread only slowly from its British birthplace.
• the different starting dates for modern economic growth in various parts of the world are the main cause of the vast differences in per capita GDP levels seen today.
• In 1820, per capita incomes in all areas were quite similar.
• Western Europe was the richest area with an average per capita income $1232.
• Africa was the poorest area with an average per capita income of $418.
• In 1998, per capita GDP in the United States was $27,331 while it was only $1368 in Africa.
• Countries that began modern economic growth more recently are catching up to the countries at an earlier date by adopting technology.
• Real GDP per capita in the richest leader countries typically grows by an average annual rate of just 2 or 3 percent per year.
• Poorer follower countries can grow much faster because they can simply adopt existing technologies from rich leader countries.
• Leader countries growth rates are limited by the rate at which new technologies can be invented and applied.
• Follower countries have been able to grow much faster by adopting more advanced technologies.
• Average annual growth rates of GDP have had remarkable effects on the standards of living relative to the leader countries.

Economic Growth Rates Matter!

• When compounded over decades, small absolute differences in rates of economic growth add up to substantial differences in real GDP and standards of living.
• U.S. citizens put in substantially more labor time and a much larger fraction of the U.S. population is employed than in other rich leader countries
• Before the advent of economic growth starting in England in the late 1700s, living standards showed no sustained increases over time.
• Large differences in standards of living exist today because certain areas like the United States have experienced nearly 200 years of modern economic growth.
• The growth rates of rich country GDPs per capita are limited to about 2 percent per year.
• By contrast, poor follower countries can grow much faster because they can simply adopt the technologies and institutions already developed by rich leader countries.
• Substantial differences in living standards can be caused by differences in labor supply as U.S. GDP per capita is nearly a third higher than French GDP per capita.
• Institutional structures that promote growth that poor follower countries can catch up and become rich leader countries by grow ing rapidly.

Institutional Structures That Promote Growth

• Strong property rights appear to be absolutely necessary for rapid and sustained economic growth as people will not invest if they believe their investments will be stolen.
• Patents and copyrights give inventors and authors the exclusive right to market and sell their creations, giving great financial incentives to invent and create.
• Efficient financial institutions channel the savings generated by households toward the businesses, entrepreneurs, and inventors that do most of society's investing and inventing.
• Literacy and widespread education are needed in order for people to be highly educated which makes for successful inventions.
• Free trade promotes economic growth by allowing countries to specialize so that different types of output can be produced in the countries where they can be made most efficiently.
• A Competitive Market System prices and profits serve as the signals that tell firms what to make and how much to make.

Ingredients of Growth

• Four supply factors increases in the quantity and quality of natural resources, increases in the quantity and quality of human resources, increases in the supply (or stock) of capital goods, and improvements in technology.
• Supply factors or changes in the physical and technical agents of production enable an economy to expand its potential GDP.
• The demand factor is that to achieve the higher production potential, households, businesses, and government must purchase the economy's expanding output of goods and services.
• The efficiency factor is that to reach its full production potential, an economy must achieve economic efficiency as well as full employment in a productive and allocative way.

Labor and Productivity

• A nation's real GDP in any year depends on the input of labor (measured in hours of work) multiplied by labor productivity
• Illustration: If work hours rise to 20,200 and labor productivity rises to $10.40, the rate of economic growth will be about 5% for the year.
• Hours of labor input depend on the size of the employed labor force and the length of the average workweek.
• Labor productivity is determined by technological progress, the quantity of capital goods available to workers, the quality of the labor itself, and the efficiency with which inputs are allocated, combined, and managed.

Accounting for Growth

• This system groups elements into two main categories: Increases in hours of work and increases in labor productivity
• Productivity growth has usually been the more significant factor, with the exception of 1973–1995 when growth greatly slowed.
• There are five factors that explain changes in productivity growth rates: technological advance, the amount of capital each worker has to work with, education and training, economies of scale, and resource allocation.
• Technological Advance accounts for about 40 percent of productivity growth.
• Quantity of Capital is a second major contributor to productivity growth, explains roughly 30 percent of productivity growth
• Education and Training contributes to a worker's stock of human capital to make a worker productive.
• Economies of Scale and improved resource allocation are a fourth and fifth source of productivity growth, and together they explain about 15 percent of productivity growth.
• The Recent Productivity Acceleration shows acceleration of recent productivity.

Reasons for the Productivity Acceleration

• The Microchip and Information Technology is the core element of the productivity speedup based on the microprocessor, or microchip.
• New Firms and Increasing Returns: tech companies have increasing returns; its output has increased, with its labor productivity has gone up. Both emerging firms as well as established firms can exploit several different sources of increasing returns and economies of scale.
• Spreading of development costs firms can spread high product development costs over greater output.
• Simultaneous consumption developed products and services can satisfy large numbers of customers at the same time.
• Network effects the greater the number of households and businesses that also buy them.
• Learning by Doing experience increasing returns through learning by doing.
• Examples of Cost Reductions from Technology due to technology.
• Global Competition and free-trade along with trade liberalization have also heightened competition internationally by removing trade protection from domestic firms enabling firms to expand.
• The economy to achieve a higher rate of economic growth and a glance back at Figure 25.2 will help make this point. A caution: will believe that business cycles continue.

Desirable and Sustainable Growth

• Antigrowth criticisms growth result in pollution, global warming, ozone depletion, and other environmental problems.
• They also argue that there is little compelling evidence that economic growth has solved sociological problems such as poverty, homelessness, and discrimination.
• Also, high-growth are high-stress economies and the planet Earth has finite amounts of natural resources available.
• Defenses for Economic Growth Growth is the path to the greater material abundance and higher living standards desired by the vast majority of people.

Economic Growth in China

• China has experienced nearly 9 percent annual growth rates boosted by capitalistic reforms.
• Income growth has been high aided by domestic saving, investment, capital goods, inexpensive labor, and foreign direct investment.
• Chinese per capita purchasing power is estimated relative to the US.
• Chinese economic growth had been accompanied by trade and the growth of imports. A cautionary tale notes investment booms in China have resulted in spending problems.
• The country still faces problems with its transition to the market system as high tariffs lead to unauthorized copying of products a huge monetary surplus.