1 Defining Economic Growth Economic growth: an increase in Real GDP. Small changes in rates of growth  Big changes over many years Compound Growth Rule of 72: doubling time is 72 divided by the annual rate of growth.

2 Comparing GDP Growth Rates

3 GDP Growth Rates and Doubling Times

4 Per Capita Real GDP Per Capita Real GDP is the real GDP divided by the population. One reason why GDP might be growing is because the population (and workforce) is growing. Higher GDP per capita  Higher standard of living

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7 Economic Growth in Pictures: Outward Shift in Aggregate Supply

8 Determinants of Growth Size and quality of the labor force: –More and better workers  More output Capital: –More and better equipment  More output Land/Natural Resources –Natural resources are not a necessary condition for economic growth … they can be acquired through trade. Technology: ways of combining resources to produce output. –Technological advances  More output from a given amount of resources.

9 Average Population Growth

10 Average Population Growth

11 Productivity the ratio of an economy’s output to its stock of labor and capital. Total Factor Productivity (TFP): the ratio of an economy’s output to its stock of labor and capital. Economic Growth = Growth of Resources + Growth of TFP

12 Determinants of Productivity Labor Quality –Education –Experience –Demographic change Technological Innovation Other Factors – –Energy prices – –Manufacturing vs. Services – –Financial Market Development

13 Productivity Growth: Annual Average Percentage Change in Average Output per Hour of Labor

14 Levels of Education United States,