ECONOMIC GROWTH One tool can have many uses!

Economic Growth Learning Objectives: Students will be able to thoroughly and completely explain: 1.The 4 key supply factors that impact economic growth. 2.The factors that limit growth.

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Key Growth Factors 1.Increases in the Quantity & Quality of Natural Resources 2.Increases in the Quantity & Quality of Human Resources 3.Increases in the Supply (or Stock) of Capital Goods 4.Improvements in Technology 5.Households, Businesses, and Government Must Purchase the Economy’s Expanded Output 6.The Economy Must Achieve Economic Efficiency (productive and allocative) as well as Full employment

Increases in the Quantity & Quality of Natural Resources Examples of natural resources? Questions: Where will we get the resources? How will we get the resources? Who will we compete with to get the resources? Solve this problem using the tools of monetary and fiscal policy available Key growth factors 4 Supply Factors that make growth possible

A Problem solving strategy 1.Create a solution that will deliver the desired result. 2.Find a way to make the solution work. 3.Select the best tool from monetary and fiscal policy that will bring your solution to life.

Problem You are in charge of economic policy Your mission is to increase the rate of growth of U.S. GDP from 0% to 4% per year in 3 years. You can use the tools of monetary policy and fiscal policy You are to focus on increasing the quantity and quality of natural resources to achieve your goal. Please try to avoid adding to the global warming problem. How would you solve this problem?

Increases in the Quantity & Quality of Human Resources Questions: Where will we get the resources? How will we get the resources? Who do we compete with to get the resources? What will we do with the resources that are of lower “quality”? Key growth factors Supply Factors that make growth possible

Increases in the Supply (or Stock) of Capital Goods Example of capital goods? What capital goods will we increase the supply of? Who will pay for those capital goods? What is the rationing mechanism for determining what goods will be produced and which ones will not? Key growth factors Supply Factors that make growth possible

Improvements in Technology Examples of technological improvements? Questions: Which technologies should we improve or grow? Who should pay for that? Who should get them? Key growth factors Supply Factors that make growth possible

Households, Businesses, and Government Must Purchase the Economy’s Expanded Output No unplanned inventories Resources fully employed Remember the circular flow model? Questions: How should we increase demand? How should we manage the increase in demand? How long will we be able to increase demand? Key growth factors for growth to be realized Demand Factor

Key growth factors for growth to be realized Efficiency Factor The Economy Must Achieve Economic Efficiency (productive and allocative) as well as Full employment Questions: How can we achieve / approach productive efficiency? How can we achieve /approach allocative efficiency? How can we achieve full employment?

PRODUCTION POSSIBILITIES ANALYSIS Supply factors make the shift possible, the Demand and efficiency factors make it real Economic Growth A B C D a b Capital Goods Consumer Goods 0

PRODUCTION POSSIBILITIES ANALYSIS Increase inputs and increase productivity of those inputs to raise real output and income. Labor and Productivity Labor productivity – real output per hour of work. Total output = worker hours x labor productivity Labor Productivity – measured by real output per worker hour. Real GDP = Hours of Work X Labor Productivity

Labor and Productivity Size of employed labor force Average hours of work Labor Inputs (hours of work) Technological advance Quantity of capital Education and training Allocative efficiency Other Labor Productivity (average output per hour) Real GDP Real GDP = hours of work x labor productivity x =

GROWTH IN THE AD-AS MODEL A B C D Capital Goods Consumer Goods Price Level Real GDP AS LR1 AS LR2 Q1Q1 Q2Q2 Growth is indicated By the rightward shift

ACCOUNTING FOR GROWTH Sources of productivity growth Technological Advance - largest contributor to increases in the productivity of American labor – 40% Quantity of Capital – 30% Education and Training - Human Capital – 15% Nation's infrastructure - public capital goods such as highways and sanitation systems, levee systems, bridges, water systems

Changes in the Educational Attainment of the U.S. Adult Population

GLOBAL PERSPECTIVE Average Test Scores, 8 th. Grade, 1999 Source: Third International Math and Science Study Mathematics Rank Score Science Rank Score Singapore South Korea Taiwan Hong Kong(China) Japan Belgium Netherlands Slovak Republic Hungary Canada United States Taiwan Singapore Hungary Japan South Korea Netherlands Australia Czech Republic United Kingdom Finland United States

Average Test Scores of Eighth Grade Students in Math & Science, Top 10 Countries and the United States, 2003 Singapore South Korea Hong Kong Taiwan Japan Belgium Netherlands Estonia Hungary Malaysia United States Singapore Taiwan South Korea Hong Kong Estonia Japan Hungary Netherlands United States Australia Mathematics Science Accounting for Growth

Accounting for Growth Accounting for Growth of U.S. Real GDP, (average annual percentage changes) Item 1953 Q2 to 1973 Q4 to 1995 Q2 to 2001 Q1 to 2007 Q3 to 2013 Q4* Increases in Real GDP Increases in Quantity of Labor Increases in Labor Productivity Source: Economic Report of the President, 2008 *Beyond 2007 are Projections

ACCOUNTING FOR GROWTH Sources of productivity growth Economies of Scale - large producers may be able to use more efficient technologies than smaller producers Improved Resource Allocation - The historical reallocation of labor from agriculture to manufacturing in the United States has increased the average productivity of labor. - 15%

PRODUCTIVITY ACCELERATION: A NEW ECONOMY? Based on 1995 – 2002 growth Reasons for the Productivity Acceleration Microchip and Information Technology Start-Up Firms New Firms and Increasing Returns

Sources of Increasing Returns More Specialized Inputs Spreading of Development Costs Simultaneous Consumption Network Effects - Increases in the value of a product to each user, including existing users, as the total number of users rises Learning by Doing Global Competition PRODUCTIVITY ACCELERATION: A NEW ECONOMY?

Macroeconomic Implications of stronger productivity growth and greater global competition. More Rapid Economic Growth Low Natural Rate of Unemployment Growing Tax Revenues Skepticism About the New Economy - too soon to judge whether the high productivity advances between 1995 and 2002 are permanent or transitory. PRODUCTIVITY ACCELERATION: A NEW ECONOMY?

Proponents of the New Economy – Innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate. PRODUCTIVITY ACCELERATION: A NEW ECONOMY?

IS GROWTH DESIRABLE AND SUSTAINABLE? The Antigrowth View – economic growth does not resolve socioeconomic problems such as income inequality. In Defense of Economic Growth - Economists who support economic growth say that it is the most practical route to the higher standards of living that the vast majority of people desire

IS GROWTH DESIRABLE AND SUSTAINABLE? Proponents of economic growth say that pollution occurs, not because of growth, but because common properties are treated as free goods.

economic growth supply factors demand factor efficiency factor labor productivity labor-force participation rate growth accounting infrastructure human capital economies of scale New Economy information technology start-up firms increasing returns network effects learning by doing