Economic Growth In order for growth to occur, economic agents – producers and consumers – must have the appropriate incentives. Growth accounting focuses on three sources of long-run economic growth: – Supply of labor – Supply of capital – The level of technology

Economic Growth Increases in any one of these elements will increase real GDP. The growth in the supply of labor is primarily the population growth rate Increases in capital or in technology increase labor productivity and thus increase real GDP

Levers of Growth Increasing savings will increase the supply of loanable funds, decrease interest rates and spur investment or increases in the capital stock. In the U.S., tax incentives are the principal method to to increase savings. IRAs and Roth IRAs are examples. During the 1970s and 1980s, stockholders in gas and electric utility companies received a tax break if they reinvested their dividends in the companies.

Levers of Growth Getting the most from comparative advantage by encouraging international trade willalso stimulate growth throughout the world. Growth can also be stimulated by improving the quality and capabilities of the labor force so workers can be more productive with a given level of capital and technology Improving the quality of education is the primary tool used here.

Economic Growth Economic growth is an increase in the potential total output of goods and services in a nation over time. Growth is measured by the change in productive capacity of an economy between one period of time and another Growth can be positive. If a nation’s GDP increases between one period and the next, the economy has experienced growth.

Economic Growth Growth can be negative. If a nation’s GDP decreases between one period and the next, the economy has contracted, and is experiencing a recession. Growth can be measured as the change in real GDP or real GDP per capita.

Economic Growth Economic growth is considered a desirable macroeconomic objective because: – As output grows, income rises and the nation is richer; – People have access tom ore and a greater variety of goods and services – New combinations of goods that previously lay outside the country’s PPC are now attainable; If the rate of economic growth exceeds the rate of population growth, the average person in a nation also becomes richer.

Measuring Economic Growth Growth is stated as a percentage change in real GDP from one period of time to the next Growth rate = GDP2 – GDP1 X 100 GPD1 Where GDP 2 is the real GDP from one year and the GDP 1 is the GPD during the previous year. Example: Assume Country A’s real GDP increases from 150 billion in 2010 to $165 billion in 2011: Country A’s growth rate = 165 – 150 = 15 X 100 = 10%

How is Growth Measured? Next, assume Country A’s real GDP decreased from $165 billion to $140 billion between 2011 and 2012: Country A’s growth rate = 140 – 165 = -25 X 100 = 15.15% The real value of Country A’s output decreased by 15.15% between 2011 and Country A’s real output fell, indicating the country experienced a recession