Ch 17-ECONOMIC GROWTH 2 POSSIBLE DEFINITIONS: 1-INCREASE IN REAL GDP 2-INCREASE IN REAL GDP PER CAPITA

6 INGREDIENTS OF GROWTH 4 SUPPLY FACTORS 1-quantity & quality of natural resources 2-quantity & quality of human resources 3-supply of capital goods 4-technology 2 DEMAND FACTORS 1-AD must increase for production to expand 2-fully employment of resources with productive & allocative efficiency

Economic Growth PRODUCTION POSSIBILITIES ANALYSIS Capital Goods b a B D Consumer Goods

GROWTH RECORD OF US INCREASED 6X SINCE 1950 BUT GROWTH DOESN’T MEASURE: 1-QUALITY IMPROVEMENTS 2-INCREASED LEISURE TIME 3-ADVERSE EFFECTS ON ENVIRONMENT

SUPPLY DETERMINANTS OF REAL OUTPUT Size of employed labor force Average hours of work Labor Inputs (Hours of Work) REAL GDP = X Technological advance Quantity of capital Education and training Allocative efficiency Other Labor Productivity (Average Output Per Hour)

HOW TO ACCOUNT FOR GROWTH More labor input---accounts for 1/3 of total economic growth Technological advances—account for 26% of US growth since 1929 Increases of capital—accounts for 18% Education & training—improves quality of labor 12% of growth from improved resource allocation & economies of scale

GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C A Price Level Capital Goods B D Q1 Q2 Consumer Goods Real GDP

ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 AS1 Price Level P2 P1 AD2 AD1 o Q1 Q2 Real GDP

OTHER ITEMS THAT HELP ECONOMIC GROWTH Social/political/cultural environment that are “growth” friendly Respect for material success Property rights & legal system Market system rewards growth

NEW ECONOMY BASED ON PRODUCTIVITY ACCELERATION Improved standard of living based on labor productivity 1-microchip technology 2-new firms & increasing profits Reasons for increasing returns(profits) A-more specialized inputs B-increased consumption C-spread R & D costs over large output Keep MC low D-networking make info goods more valuable

PRODUCTIVITY ACCELERATION PART 2 3-Global competition encourages efficiency 4-Faster growth w/o inflation possible with higher productivity 5-NRU decreasing from 6%

IS GROWTH DESIRABLE & SUSTAINABLE? ANTI-GROWTH GROWTH CAUSES: ENVIRONMENTAL PROBLEMS HIGH STRESS DEAD-END JOBS; BURNOUT PRO-GROWTH GROWTH CAUSES IMPROVEMENTS IN: STANDARD OF LIVING WORKING CONDITIONS LEISURE GETTING RID OF POVERTY MORE OPTIONS TO DEAL WITH ENVIRONMENTAL ISSUES *ONLY LIMIT TO GROWTH IS HUMAN IMAGINATION