Chapter 3 Growth These slides supplement the textbook, but should not replace reading the textbook

2 Why is growth important? Because things wear out, they deteriorate over time.

3 Is absolute growth or relative growth important? Relative growth is more important because a decline in the rate of growth could precipitate an increase in unemployment.

4 Shifts in the Economy’s PPF An increase in productivity Consumer goods Capital goods FF'F' A A'A'

5 What will happen if we do not grow? Things will wear out, each day we have less and less, and unemployment worsens.

6 Shifts in the Economy’s PPF A decrease in productivity Consumer goods Capital goods F''F A'' A

7 How can we increase GDP? More investment this year, higher GDP next year

8 What is the Austrian view of growth? Save and invest in a free market. Saving is defined as money earned but not spent.

9 What is the Keynesian view of growth? Stimulate demand.

10 What type of growth is best? Slow and steady

11 Is it reasonable to believe we can eliminate slumps? Keynesians would say "yes." Austrians tend to believe that slumps are inevitable.

12 How do we measure growth? Gross Domestic Product (GDP) which is a measure of all "new" and "final" goods and services produced in any one year

13 What is new and final? New goods are goods that did not exist last year. A final good is the end result of the industrial process.

14 What are examples of new and final? Lumber would be an intermediate good, the house that was built with the lumber is a final good.

15 When is measuring GDP useful? If we measure real GDP from one year to the next over a span of time we can know where we are going and how fast.

16 What is "real" GDP and "money" GDP? Money GDP is not adjusted for inflation, real GDP factors out the variable of inflation.

17 Once we calculate real GDP from year to year, how do we calculate the percent increase or decrease? We take the difference between the 2 numbers and divide by the original number.

18 What is an example? From 3 to 5 is a 67% increase, 2 / 3 = 67. From 5 to 3 is a 40% decrease, 2 / 5 = 40%

19 Who finds this information most useful? Keynesians find these measurements more useful than do Austrians.

20 What is the “rule of man”? The practice of putting oneself above the law when one has the authority.

21 What is the “rule of law”? There is a respect and adherence to the law and secure property rights.

22 What is the basis of the “rule of law”? Secure property rights.

23 How does the rule of law and the rule of man relate to growth in Japan?  Laws favored savers.  Loan money to favored persons.

24 How does moral hazard relate to Japan? Japan has supported failing companies

25 What is moral hazard? Companies which are not allowed to fail will have the incentive to take huge risks.

26 What are hindrances to growth? Rule of man dominates. Excessive taxes. Excessive regulations. Large national debt.

27 What is the key to growth? Increase productivity.

28 How can consumers buy things at reasonable prices? Competition whereby lower costs will lead to lower prices and more profit

29 What is productivity? The ratio of a specific measure of output to a specific measure of input

30 When does productivity increase? When the units of output is more than the units of input

31 How do we increase productivity? Produce more per unit of time at a lower per unit cost.

32 How do we increase productivity? Inventions and Innovations.

33 If we did away with machines, would more people have jobs? No, workers would be less productive without machines

34 Does automation lead to unemployment? No, the more machines we have the more jobs we will have.

35 Why does an increase productivity lead to economic growth?  Lower costs lead to lower prices  the lower prices leads to an increase in buying power  the increase in aggregate demand leads to growth

36 What factors lead to an increase in productivity?  Inventions (more and better capital)  growth in human capital  Innovations  economies of scale  mobile labor force

37 What is innovation? A new way of doing something

38 What is a specialization of labor? Focusing an individual’s efforts on a particular product or a single task

39 Why does the assembly line increase productivity?  Eliminates nonproductive activity  Repetition faster  Better use of capital

40 How does the specialization of labor increase productivity?

41  Takes advantage of individual natural abilities  Allows workers to develop more experience at a particular task  Permits the introduction of labor-saving machinery  Reduces time required to shift between tasks

42 What does the term economies of scale mean? A companies average costs decrease over the long run as the company grows, growth can be global

43 Why is America becoming less competitive around the world? Economies of scale are hampered internationally by government regulations – trade restrictions

44 Why do lengthy and complex laws hinder productivity? Laws against wearing a tie can be easily understood and enforced. Laws against wearing a beautiful tie cannot be easily understood or enforced.

45 What are some examples of government regulation? Glass Steagall Act of 1933 Financial Services Modernization Act of 1999 Sarbanes-Oxley Act of page Health Care Bill 2010 Financial Reform Bill of 2010 The Volcker Rule 2010 Keystone XL Pipeline decision 2011

46 What does the housing market have to do with a mobile labor force? Many people are upside down on their mortgages and cannot relocate very easily

47 What does our growing national debt have to do with growth? The more we pay in interest the less we have to invest, especially when so much of the interest is paid to foreigners

48 What does monetizing the debt have to do with growth? Money creation leads to inflation and inflation distorts price signals, erodes buying power, and leads to more unemployment

49 What is the concept of crowding out? The more the government borrows the less savings is available for business and consumers to borrow

50 What happens to productivity as the economy slips into a recession? It increases as the less productive workers are laid off and the more productive workers make up more of the labor force

51 Which companies are hurt the most when costs increase? Companies who face a relatively elastic demand curve.

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