Section 7 - Module 37-38-39-40 Economic Growth

Module 37 What is GDP? What is GDP per Capita? What’s the difference between Real GDP and Nominal GDP?

Module 37 GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M). Here is a description of each GDP component: C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. The total GDP divided by the amount of people in a country. Taking the nominal gdp and accounting for inflation to get real GDP

Module 37 Comparing Economies Across Time and Space Real GDP per capita Real GDP divided by the population size Focus on this bc it isolates the effect of changes in the pop. Serves as a summary measure of a country’s economic progress over time Figure 37.1 - while China and India have higher growth rates, they are still just now reaching the level of the US in the year 1908

Module 37 Question: If there are 2000 people in a country and the total Real GDP is $4 million - what is the GDP per capita?

Module 37

Module 37 Growth Rates Mathematical formula that tells us how long it takes real GDP per capita - or other variables - to double. Number of years for variable to double = 70/Annual Growth rate of variable Rule of 70 only applied to positive growth rate Ex. If the GDP per capita grows at 1% per ear, it will take 70 years to double.

Module 37 Based on the chart and the Rule of 70, how long will it take _____ to double? China India Ireland US Why can’t we use the rule of 70 on Zimbabwe? If the growth rate of a country changes from 3 to 1 percent, how many more years will it take to double?

Module 37 Sources of Long-Run Growth Labor Productivity - Output per worker, or output per hour Output per worker = Real GDP / # of people working Rising productivity = #1 reason for long-run economic growth Why? Rate of employment growth is near the rate of population growth. Real GDP per capita must be the result of increased output per worker.

Module 37 Explaining Growth in Productivity Physical Capital Manufactured goods used to produce other goods and services Buildings, machinery Human Capital Improvement in labor created by the education and knowledge in the workforce Increased education = increased human capital Technology Improves labor productivity More tech = more production

Module 38 Accounting for Growth: The Aggregate Production Function Shows how productivity depends on the quantities of physical capital per worker and human capital per worker as well as technology. Allows economists to see the effects of the 3 factors on overall productivity Formula on page 376 2. Which of the following does not affect the level of productivity? Education of workforce Size of labor force Technology improvements Educational improvements Low literacy rates Increase in capital stock

Module 38 Human Capital Physical Capital Technology Capital Stock Education of workforce Physical Capital Tools people use Technology Advances = more productivity Capital Stock Term on test - referring to overall capital (human and physical) Increased capital stock = shifts Productivity Curve UPWARD

Module 38 Technological Progress and Productivity Growth Tech progress shifts curve upward Change in years shows progress of tech on productivity Shift from A to C = increased savings = increased investment Shift from C to D = improvements in tech, education, healthcare, etc.

Module 38 - Key Terms Diminishing Returns to Physical Capital Holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to smaller increase in productivity Growth Accounting Estimate the contribution of each major factor in the aggregate production function to economic growth. Total Factor Productivity Is the amount of output that can be achieved with a given amount of factor inputs.

Module 39 Why Growth Rates Differ Capital, Tech, and Growth Differences Adding to Physical Capital Increased stock of physical capital at rapid rates = high rates of investment spending Where does the money come from? Savings = investment! Increased Savings = increased investment = higher growth of physical capital

Why growth rates differ - part 2 Adding to Human Capital Higher education levels - higher human capital Ex. East asia has higher increases in education than Latin America See table 39.1 for side by side comparison

Module 39 Why Growth Rates Differ - Part 3 Technological progress Advance of tech is key behind economic growth R&D - Research and Development Spending to create new tech and prep for practical use

Module 39 The Role of Government in Promoting Economic Growth Governments and Physical Capital Infrastructure Roads, power lines, ports, information networks and other physical capital that provide a foundation for economic activity Govt & Human Capital Govt spending on education Taxes for public schools for primary and secondary 2. What are your thoughts on the government supporting the payment of higher education for students? Would this positive or negative for a country? http://money.cnn.com/2016/04/26/pf/college/tuition-free-college-bernie-sanders/

Module 39 Role of Govt Continued Govt and Technology Mostly private investment, but some R&D done by govt agencies, such as Brazil govt researching soil and helping develop new varieties of crops Political Stability, etc. Political Stability and protection of property rights are crucial for long-run econ. Growth Laws and institutions help stability & less corruption

Module 39 Is World Growth Sustainable? Negative Externalities What is sustainability? Whether it can continue in the face of limited supply of natural resources Natural Resources and Growth Read over pages 391-392 for further clarifications Negative Externalities The cost that individuals or firms impose on others without having to offer compensation. What global impact does increased productivity have on the world and environment? What are the pros and cons?

Module 39 Look at Module 39.3 for Climate change and country growth. Countries that are increasing production also increase carbon dioxide emissions. Which country has the most? Who was the country that produced the most before that country?

Module 39 What’s the general economist conclusion about climate change and economic growth? Global climate change is a problem, but market incentives and government actions can help.

Module 40 Read and complete Tackling the Test problems on page 403 #1-5