AP Macroeconomics Economic Growth & Productivity

Module 37 Standard of living (or quality of life) can be measured, in part, by how well the economy is doing… But it needs to be adjusted to reflect the size of the nation’s population. Real GDP per capita is real GDP divided by the total population. It identifies on average how many products each person makes. Real GDP per capita is the best measure of a nation’s standard of living. 2

Economic Growth Defined Sustained increase in Real GDP over time. Sustained increase in Real GDP per Capita over time ( real GDP divided by the population size). Economic growth is not simply the recovery from a recession. Economic growth fundamentally increases the nation’s ability to produce goods and services. One way to think about economic growth is to think back to the model of production possibilities. Short-run recovery is a movement from a point inside the PPC to the limits of the PPC. Long run economic growth is an outward shift of the entire PPC.

Sample Problem If a country has a population of 1,000 an area of 100 square miles, and a GDP of $5,000,000, then its GDP per capita is: A) $500 B) $5,000 C) $50,000 D) 5,000,000 E) $50

Sample Problem If a country has a population of 1,000 an area of 100 square miles, and a GDP of $5,000,000, then its GDP per capita is: A) $500 B) $5,000 C) $50,000 D) 5,000,000 E) $50

Practice Quiz Which of the following is the key statistic used to track economic growth? a. GDP b. real GDP c. real GDP per capita d. median real GDP e. median real GDP per capita Duffka School of Economics

FIGURE 47.1 Year Hamilton Real GDP Hamilton Population Jefferson Real GDP Jefferson Population 1 $2.1 billion70,000$500, $2.5 billion80,000$525, $2.8 billion90,000$600, $2.7 billion86,000$650,00018 Part A: Measuring Economic Growth in Hamilton and Jefferson County 1. Using Figure 47.1 as a reference, fill out the tables in Time PeriodHamilton % ch. In Real GDPJefferson % ch. In Real GDP Year 1 to Year 2 19% [( )/2.1] 5% [( )/500] Year 2 to Year 3 12%14.3% Year 3 to Year %8.3%

FIGURE 47.1 Year Hamilton Real GDP Hamilton Population Jefferson Real GDP Jefferson Population 1 $2.1 billion70,000$500, $2.5 billion80,000$525, $2.8 billion90,000$600, $2.7 billion86,000$650,00018 Figure 47.3: Year Hamilton Per Capita Real GDPJefferson Per Capita Real GDP 1$30,000 ($2,100,000,00/70,000) $33, $31,250$32, $31,111$35, $31,395$36, Part A: Measuring Economic Growth in Hamilton and Jefferson County

FIGURE 47.1 Year Hamilton Real GDP Hamilton Population Jefferson Real GDP Jefferson Population 1 $2.1 billion70,000$500, $2.5 billion80,000$525, $2.8 billion90,000$600, $2.7 billion86,000$650,00018 Time Period Hamilton % ch. In Per Capita Real GDPJefferson % ch. In Per Capita Real GDP Year 1 to Year % ( /30000) -1.6% Year 2 to Year %7.56% Year 3 to Year %2.31% Part A: Measuring Economic Growth in Hamilton and Jefferson County

2. When did Hamilton County experience the largest growth in real GDP? ____________ In per capita real GDP? ____________ Are these growth rates different? Explain. 3. When did Jefferson County experience the largest growth in real GDP? ____________ In per capita real GDP? ____________ Are these growth rates different? Explain. 4. The residents of Hamilton County believe they live in a wealthier community than small rural Jefferson county. Based on these numbers, do they? Explain. YEAR 1 TO 2 YEAR 2 TO 3 Both increased the most from year 1 to year 2. However, per capita real GDP increased by less than real GDP because of population growth. The per capita growth rate is smaller than the GDP growth rate because the population has increased. No. Real GDP per capita is larger in Jefferson County than in Hamilton County.

14 There are some problems with using GDP to measure a nation’s true standard of living

The top 10 most populated countries 15

GDP Per Capita 16

Real GDP per Capital

Real GDP per Capital Real GDP per Capital

II. The Sources of Long-Run Growth A. The Crucial Importance of Productivity Sustained growth in real GDP per capita occurs only when the amount of output produced by the average worker increases steadily. Labor productivity = (real GDP/# of people working) If workers are creating more output, on average, the size of the economic pie will be rising and the average person’s slice will also be rising. What factors lead to higher productivity? Duffka School of Economics

Growth Rates Growth Rates Rule of 70 = number of years for variable to double = 70/annual growth rate of variable. So if real GDP per capita grows at 2% per year, it will take 35 years to double GDP per capita. The US average growth rate is 1.9%.

Sample Problem The rule of 70 indicates that a 6% annual increase in the potential level of real GDP would lead to the potential output doubling in about _____years. A) 6 B) 12 C) 24 D) 30 E) 35

Sample Problem The rule of 70 indicates that a 6% annual increase in the potential level of real GDP would lead to the potential output doubling in about _____years. A) 6 B) 12 C) 24 D) 30 E) 35

Why Grow? Growth leads to greater prosperity for society. Lessens the burden of scarcity. Increases the general level of well- being.

Conditions for Growth Willingness to sacrifice current consumption in order to grow Saving Trade

Sample Problem In the long run an increase in saving will generally: A) reduce the rate of economic growth B) leave the rate of economic growth unchanged C) increase the rate of economic growth D) increase consumption simultaneously E) decrease the standard of living

Sample Problem In the long run an increase in saving will generally: A) reduce the rate of economic growth B) leave the rate of economic growth unchanged C) increase the rate of economic growth D) increase consumption simultaneously E) decrease the standard of living

The Sources of Long-Run Growth Physical Capital (Machinery) Human Capital (Education) Technology (new methods of production)

Physical Capital Tools, machinery, factories, infrastructure Physical Capital is the product of Investment. Investment is sensitive to interest rates and expected rates of return. It takes capital to make capital. Capital must be maintained.

Sample Problem Physical capital would include: A) the education or knowledge a worker has in his or her physical being B) the tools a worker has to work with C) the money available for the worker to use D) the stocks and bonds in an individual’s portfolio E) the natural resources a worker has to work with

Sample Problem Physical capital would include: A) the education or knowledge a worker has in his or her physical being B) the tools a worker has to work with C) the money available for the worker to use D) the stocks and bonds in an individual’s portfolio E) the natural resources a worker has to work with

Technology & Productivity Research and development, innovation and invention yield increases in available technology. More technology in the hands of workers increases productivity. Productivity is output per worker. More Productivity = Economic Growth.

Human Capital People are a country’s most important resource. Therefore human capital must be developed. Education Access to technology

AN EXAMPLE OF HOW INVESTMENT IN HUMAN CAPITAL CAN LEAD TO INCREASED GROWTH AND A HIGHER GDP PER CAPITA

Sample Problem Investment in human capital shifts the aggregate production function: A) downward B) leftward C) inward D) rightward E) upward

Sample Problem Investment in human capital shifts the aggregate production function: A) downward B) leftward C) inward D) rightward E) upward

Growth Illustrated GDP R PL AD SRASLRAS YFYF P

B. The Role of Government in Promoting Economic Growth 1. Governments and Physical Capital Governments provide infrastructure by building roads, airports, seaports, electrical grids and many others. These systems help consumers and firms engage in economic activity that promotes economic growth. Private firms also invest in physical capital like building new factories, shopping malls, and housing developments. Firms also purchase computer systems, delivery trucks, forklifts and many other pieces of physical capital. If the government can provide infrastructure and maintain a financial system that provides for the saving and borrowing that is required for private investment, a nation’s physical capital will grow. Duffka School of Economics

B. The Role of Government in Promoting Economic Growth 1. Governments and Physical Capital 2. Governments and Human Capital Governments pay for the vast share of primary and secondary education. Any American child can complete high school at very little out-of- pocket expense. When nations make education a higher priority, they subsidize it. More people acquire the education and the nation prospers with long-run economic growth. Duffka School of Economics

B. The Role of Government in Promoting Economic Growth 1. Governments and Physical Capital 2. Governments and Human Capital 3. Governments and Technology While much R & D is done by private companies, the government subsidizes this research with grants. The government also provides direct support and grant money to professors at public and private universities and that research helps to drive technological progress. Duffka School of Economics

B. The Role of Government in Promoting Economic Growth 1. Governments and Physical Capital 2. Governments and Human Capital 3. Governments and Technology 4. Political Stability, Property Rights, and Excessive Government Intervention Revolutions and changes to government cause investment to decrease. Investors like stability. Duffka School of Economics

Growth Illustrated GDP R PL AD SRAS LRAS YFYF P

MODULE 40 LONG-RUN ECONOMIC GROWTH IS BASED UPON THE SUSTAINED RISE IN THE PRODUCTION OF GOODS AND SERVICES SHORT-RUN “UPS” AND “DOWNS” ARE THE RESULT OF THE BUSINESS CYCLE

Growth Illustrated or PPC Capital Goods Consumer Goods..   PPC 1 

Remember this? Economic Growth and Potential Growth for the Production Possibility Curve

I. Productivity and Growth A. Accounting for Growth: The Aggregate Production Function: Productivity depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology. +$30,000 +$15,000 +$10,000 Duffka School of Economics

What About Natural Resources? What About Natural Resources? Other things equal, more natural resources leads to higher GDP per capita Other things are often NOT equal (Political / Legal instability)

THE ISSUE OF GROWTH AND ENVIORNMENTAL DAMAGE IS A WORLD-WIDE ISSUE AND NOT A UNITED STATES ISSUE ALONE

ENVIORNMENTAL CONCERNS Pollution is a negative externality because it allows firms to impose a cost on society without having to pay compensation Many have called for “cap and trade” policies which impose costs and limits/purchases/trades on firms who are engaged in pollution type industries.

Are Economies Converging? Convergence Theory: differences in real GDP per capita among countries tend to narrow over time because countries that state with lower real GDP per capita tend to have higher growth rates.

Long-run Growth and the LRAS Curve

From the Short Run to the Long Run: Notice the impact of wages on SRAS since wages are an input

Hindrances to Growth Economic and Political Instability – High inflationary expectations Lack of Savings Excess current consumption Failure to maintain existing capital Crowding Out of Investment – Government deficits & debt increasing long term interest rates! Trade Barriers

2005 AP Exam Questions Changes in which of the following factors would affect the growth of an economy? I.Quantity and quality of human and natural resources II.Amount of capital goods available III.Technology A.I onlyB. I and II only C.I and III onlyD. II and III only E. I, II, and III

2005 AP Exam Questions The long-term growth rate of an economy will be increased in all of the following ways EXCEPT A.Capital stock B.Labor supply C.Real interest rates D.Rate of technological change E.Spending on education and training

2012 AP Exam Question Which of the following best illustrates an improvement in a country’s standard of living? a.An increase in real per capita gross domestic product b.An increase in nominal per capita gross domestic product c.Price stability d.A balanced budget e.An increase in the consumer price index

2012 AP Exam Questions An increase in which of the following would LEAST likely increase labor productivity? a.Physical capital b.Human capital c.Technological improvements d.Educational achievement e.The labor force

2012 AP Exam Question The shifting of a country’s production possibility curve to the right will most likely cause a.Net exports to decline b.Inflation to increase c.The aggregate demand curve to shift to the left d.The long-run aggregate supply curve to shift to the left e.The long-run aggregate supply curve to shift to the right