Economic Growth: Measurement and Goals

Economic Growth Measurement

• Economic growth measures as an increase in real GDP over time.
• Economic growth can also be measured as an increase in real GDP per capita over time.
• Economic growth calculates as a percentage rate of growth per quarter or per year.
• Real GDP per capita is the amount of real output per person in a country.
  • Calculated by dividing real GDP by the population.
• Real GDP growth is more useful for measuring military expansion or political influence.
• Real GDP per capita growth is more useful for comparing living standards between countries.

Growth as a Goal

• Economic growth is a widely held economic goal.
• Expansion of output relative to population leads to higher living standards.
• Growing economies can better meet people's needs and resolve socioeconomic problems.
• Growth allows nations to achieve economic goals more easily and undertake new endeavors.

Arithmetic of Growth

• An apparently small difference in the rate of growth becomes highly significant over many years.
• The rule of 70 estimates the doubling time of a variable by dividing 70 by its annual percentage growth rate.

Growth in the United States

• Real GDP in the U.S. has grown at an annual rate of about 3.1% since 1950.
• Real GDP per capita has grown at roughly 2.0% annually during the same period.
• GDP figures do not fully account for improvements in products, added leisure, or other impacts that affect the well-being.
• U.S. growth rates are not constant or smooth over time, varying quarterly and annually.

Modern Economic Growth

• Living standards are substantially and sustainably increased.
• Modern economic growth began with the Industrial Revolution in the late 1700s.
• Mass production using factories, steamships, and steam locomotives led to increased long-distance trade.
• Countries with modern economic growth are constantly exposed to new technologies, products, and services.
• Modern economic growth has vastly affected cultural, social, and political arrangements.
  • Increases in wealth have allowed ordinary people to have leisure time and enjoy the arts.
  • Countries have abolished feudalism, implemented public education, and eliminated social and legal restrictions on minorities.
  • Countries have tended to move toward democracy.
• The average human lifespan has more than doubled.

Uneven Distribution of Growth

• Modern economic growth is unevenly distributed across the world.
• Western Europe and the United States experienced modern economic growth earlier than other areas.
• The different starting dates for modern economic growth causes the vast differences in per capita GDP levels seen today.
• Poorer follower countries can grow much faster because they can simply adopt already established technology.
• Leader countries grow more slowly than follower countries.

Promoting Modern Economic Growth

• Strong property rights needed
  • Allows individuals to retain returns
• Patents and copyrights incentivize innovation
  • Protects inventions and ideas
  • Gives inventors financial incentives to create
• Efficient financial institutions channel household savings toward businesses
• Literacy and widespread education needed
  • For productive use of complex production processes
• Free trade
  • Allows specialization, resulting in more efficient production
  • Promotes the rapid spread of new ideas
• Competitive market system
  • Prices & profit serve as signals
  • Provides entrepreneurial incentives

Determinants of Economic Growth

• Supply Factors:
  • Increases in the quantity and quality of natural resources
  • Increases in the quantity and quality of human resources
  • Increases in the supply of capital goods
  • Improvements in technology
• Demand Factor:
  • Expansion of output requires increased total spending
• Efficiency Factor:
  • Requires productive and allocative efficiency

Production Possibilities Analysis

• Improvements in supply factors will shift the production possibilities curve outward.
• Increased total spending will move the economy to a point on the expanded curve.

Labor and Productivity

• Real GDP = hours of work × labor productivity
• Economic growth depends on increases in labor inputs and productivity
• Hours of labor depend on the size of the employed labor force and the average workweek.
• Labor productivity is determined by technological progress, capital goods, labor quality, and efficiency.
• Labor productivity rises workers have more and better machinery and when work is better organized and managed.

Accounting for Growth

• Growth accounting assesses supply-side elements that contribute to changes in real GDP.
• Groups elements into quantity of labor and labor productivity.

Labor Inputs versus Labor Productivity

• Increases in both quantity of labor and labor productivity are important sources of economic growth.
• Falling birthrates have slowed the growth of the native population.

Technological Advance

• Technological advance accounts for about 40% of productivity growth
• Includes new production, managerial methods, and business organizations that improve production
• The purchase of new computers brings speedier, more powerful computers that incorporate new technology.

Quantity of Capital

• Increased capital explains roughly 30% of productivity growth
• More and better plant and equipment make workers more productive.
• Public investment in infrastructure & private investment in infrastructure plays a large role in economic growth.

Education and Training

• Contribute to a worker's stock of human capital.
• Investment in human capital raises labor productivity and earnings

Economies of Scale

• 15 % of productivity growth
• Reductions in per-unit production costs that result from increases in output levels.
• Markets sizes increase over time, allowing firms to increase output levels and achieve associated production advantages with greater efficiency.

Improved Resource Allocation

• 15 % of productivity growth
• Means that workers over time have moved from low-productivity to high-productivity employment.

Fluctuations in Average Rate of Productivity Growth

• U.S. labor productivity grew 1.5% yearly over the 1973 – 1995 period.
• U.S. Labor productivity grew 2.6% per year between 1995 and 2010.
• Recent Productivity Slowdown: 0.4 percent -Possible Explanations: High debt, overcapacity, rise of "free" internet products, and Technological Slowdown.

Reasons for Rise in Average Rate of Productivity Growth

• Core element was explosion entrepreneurship/innovation based on the microchip
• The computer, fiber-optic cable, wireless technology, and internet advances in information technology used to connect all parts of the world.

New Firms and Increasing Returns

• Firms experience increasing returns, which increasing the % Amount of output the firm produces.
• Results are higher productivity that tend to reduce per-unit cost is producing or delivering profits.

Global Competition

• The economy of by high is characterize information Technology, new tech, and heightened global competition.
• Economic growth and global completion allows firms to lower their costs and prices, allowing the economy to achieve higher rates of economic growth.

Is Growth Desirable and Sustainable?

• The Antigrowth View
  • Critics: Industrialization and growth result in polution.
  • These adverse negatives externalities occur.

In Defense of Economic Growth

• The primary defense: It is the path to the greater material abundance and higher living standards desires.