1. Mehdi Arzandeh, University of Manitoba PowerPoint Presentation by

2. 8-2 © 2016 McGraw ‐ Hill Education Limited LEARNING OBJECTIVES LO8.1List two ways that economic growth is measured. LO8.2Define modern economic growth and explain the institutional structures an economy needs in order to experience it. LO8.3Identify the general supply, demand, and efficiency forces that give rise to economic growth. LO8.4Describe growth accounting and specific factors accounting for economic growth in Canada. LO8.5Explain the recent trend toward productivity acceleration. LO8.6Discuss differing perspectives on whether growth is desirable and sustainable. 8 Economic Growth

3. Economists define and measure economic growth as either: An increase in real GDP occurring over some time period. An increase in real GDP per capita occurring over some time period. Real GDP per capita = Real GDP/population LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-3

4. Real GDP Growth Example Real GDP in Canada was $1705.6 billion in 2013 and $1747.2 billion in 2014 Percent change in growth =[(2014 real GDP -2013 real GDP)/2013 GDP] × 100 = [($1747.2 billion - $1705.6 billion)/$1705.6 billion] × 100= 2.4 %. LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-4

5. Real GDP per Capita Growth Example Real GDP in Canada was $1705.6 billion in 2013 and population was 35.3 million. Real GDP per capita = $48,315. In 2014, real GDP per capita rose to $48,941. Canada’s rate of growth of real GDP per capita for 2014: [($48,941 - $48,315)/$48,315] × 100 = 1.3 percent. LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-5

6. Growth as a Goal Growth is a widely held economic goal Growth rises standards of living Growth lessens the burden of scarcity LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-6

7. Arithmetic of Growth Rule of 70 Approximate number of years required to double real GDP = 70 / annual percentage rate of growth. For example, a 5% annual rate of growth will double real GDP in about 14 years (= 70/5). LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-7

8. © 2016 McGraw ‐ Hill Education Limited LO1 8-8 TABLE 8-1 Real GDP and Per Capita GDP, 1961-2011 (1) Year (2) GDP (billions of 2002 $) (3) Population (million) (4) Per capita GDP (2002 $) (2) / (3) 1961322.718.317,633 1966439.120.121,845 1971534.022.024,272 1976668.923.228,831 1981789.824.931,171 1986888.926.233,965 1991977.328.134,779 19961116.829.737,602 20011348.331.143,353 20061541.632.747,143 20141747.235.748,941 Source: Statistics Canada. Canadian Economic Observer: Historical Statistical Supplement.

9. Growth in Canada Improved Products and Services Added Leisure Other Impacts LO1 © 2016 McGraw ‐ Hill Education Limited 8.1 Economic Growth 8-9

10. The historically recent phenomenon in which nations have experienced sustained increases in real GDP per capita Dramatic increases in the standard of living Started with the Industrial Revolution of late 1700s Prior to 1700s, GDP per capita was flat over long periods of time. LO2 © 2016 McGraw ‐ Hill Education Limited 8.2 Modern Economic Growth 8-10

11. Economic growth has vastly affected cultural, social and political arrangements Culturally: for the first time in history ordinary people have significant time for leisure activities and the arts Socially: has allowed for universal public education, elimination of ancient social norms and legal restrictions against women and minorities doing certain jobs or holding certain positions Politically: countries experiencing modern economic growth have tended to move toward democracy LO2 © 2016 McGraw ‐ Hill Education Limited 8.2 Modern Economic Growth 8-11

12. The Uneven Distribution of Growth Modern economic growth has spread slowly from its British birthplace. First advanced to France, Germany, and other parts of Western Europe in the early 1800s before spreading to Canada, the United States, and Australia by the late 1800s. Japan began to industrialize in the 1870s. The rest of Asia did not follow until the early to mid 1900s, at which time large parts of Central and South America as well as the Middle East also began to experience economic growth. Africa for the most part did not experience sustained economic growth until the past 20 years. Some parts of the world have yet to experience economic growth at all. LO2 © 2016 McGraw ‐ Hill Education Limited 8.2 Modern Economic Growth 8-12

13. © 2016 McGraw ‐ Hill Education Limited LO2 8-13 FIGURE 8-1 The Great Divergence in Living Standards Source: Angus Maddison, The World Economy: A Millennial Perspective (Paris: OECD, 2001), p. 264.

14. Catching Up Is Possible Leader countries: As it relates to economic growth, countries that develop and use advanced technologies, which then become available to follower countries. Follower countries: As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries. LO2 © 2016 McGraw ‐ Hill Education Limited 8.2 Modern Economic Growth 8-14

15. © 2016 McGraw ‐ Hill Education Limited LO2 8-15 TABLE 8-2 Real GDP Per Capita in 1960 and 2010 (plus average annual growth rates of GDP per capita 1960-2010 for eight selected countries, 2005 dollars) CountryReal GDP per capita, 1960 Real GDP per capita, 2007 Average annual growth rate, 1960-2007 United States14,77641,3652.1 Canada12,03037,1032.1 United Kingdom11,25734,2682.2 France9,34731,2992.4 Ireland6,66634,8773.3 Japan5,47231,4773.5 Singapore4,14955,8625.2 Hong Kong3,84938,8654.6 South Korea1,76526,6095.4 Source: Penn World Table version 6.3. Note: GDP figures for all countries are measured in “international dollars” of equal value to U.S. dollars in 2005.

16. Institutional Structures That Promote Growth Strong Property Rights Patents and Copyrights Efficient Financial Institutions Literacy and Education Free Trade Competitive Market System LO2 © 2016 McGraw ‐ Hill Education Limited 8.2 Modern Economic Growth 8-16

17. Six “ingredients” of economic growth Supply factors 1. increases in the quantity and quality natural resources, 2. increases in the quantity and quality of human resources, 3. increases in the supply (or stock) of capital goods, and 4. improvements in technology. LO3 © 2016 McGraw ‐ Hill Education Limited 8.3 Determinants of Growth 8-17

18. 5. Demand factor The increase in the level of aggregate demand that brings about the economic growth made possible by an increase in the production potential of the economy LO3 © 2016 McGraw ‐ Hill Education Limited 8.3 Determinants of Growth 8-18

19. 6. Efficiency factor The capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors make possible. Least costly way (productive efficiency) Maximum well-being (allocative efficiency) LO3 © 2016 McGraw ‐ Hill Education Limited 8.3 Determinants of Growth 8-19

20. © 2016 McGraw ‐ Hill Education Limited LO3 8-20 FIGURE 8-2 Economic Growth and the Production Possibilities Curve Consumer Goods Capital Goods a Economic Growth b A C BD c

21. LABOUR AND PRODUCTIVITY Decompose real GDP growth Real GDP = worker-hours x labour productivity % change in GDP = % change in worker-hours + % change in productivity Labour productivity the average product of labour output per worker per hour Labour force participation rate The percentage of the working age population that is actually in the labour force LO3 © 2016 McGraw ‐ Hill Education Limited 8.3 Determinants of Growth 8-21

22. © 2016 McGraw ‐ Hill Education Limited LO3 8-22 FIGURE 8-3 The Supply Determinants of Real Output Size of employed labour force Average hours of work Labour Inputs (hours of work) Technological advance Quantity of capital Education and training Allocative efficiency Other Labour Productivity (average output per hour) Real GDP x =

23. Output growth in Canada has been considerably greater in the last half century than can be attributed solely to increases in the inputs of labour and capital. Two other factors are involved 1.Interindustry shifts from lower- to higher-productivity occupations. 2.Multifactor productivity (MFP) growth efficiency with which factors are used together in the production process LO4 © 2016 McGraw ‐ Hill Education Limited 8.4 Accounting for Growth in Canada 8-23

24. © 2016 McGraw ‐ Hill Education Limited LO4 8-24 TABLE 8-3 Annual Average Growth Rates of Productivity in Canada, 1946-2011* YearsOutputEmploymentHours workedOutput per worker Output per hour 1946-20113.81.71.22.02.5 1946-19735.01.60.93.34.0 1973-19813.52.72.00.81.4 1981-19893.31.8 1.41.5 1989-20112.31.31.0 1.3 *The business sector Source: Centre for the Study of Living Standards.

25. Reasons for Growth Inputs versus productivity Quantity of labour Technological advances Quantity of capital Education and training LO4 © 2016 McGraw ‐ Hill Education Limited 8.4 Accounting for Growth in Canada 8-25

26. Economies of Scale and Resource Allocation ECONOMIES OF SCALE: Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run IMPROVED RESOURCE ALLOCATION: workers have moved over time from low-productivity employment to high-productivity employment LO4 © 2016 McGraw ‐ Hill Education Limited 8.4 Accounting for Growth in Canada 8-26

27. Reasons for the Productivity Acceleration 1. The microchip and information technology 2. New firms and increasing returns:  More Specialized Inputs  Spreading of Development Costs  Simultaneous Consumption  Network Effects  Learning-by-Doing 3. Global competition LO5 © 2016 McGraw ‐ Hill Education Limited 8.5 The Rise in the Average Rate of Productivity Growth 8-27

28. Implication: More-Rapid Economic Growth Stronger productivity growth and heightened global competition allow the economy to achieve a higher rate of economic growth. LO5 © 2016 McGraw ‐ Hill Education Limited 8.5 The Rise in the Average Rate of Productivity Growth 8-28

29. 8.1 GLOBAL PERSPECTIVE Global Competitiveness Index © 2016 McGraw ‐ Hill Education Limited LO5 8-29

30. What Can We Conclude? The prospects for a lasting increase in productivity growth are good. Time will tell. LO5 © 2016 McGraw ‐ Hill Education Limited 8.5 The Rise in the Average Rate of Productivity Growth 8-30

31. The Anti-Growth View Industrialization and growth result in pollution, global warming, ozone depletion, and other environmental problems. No evidence that economic growth has solved sociological problems such as poverty, homelessness, and discrimination. Growth permits us to “make a better living,” it does not give us “the good life”. High growth rates are not sustainable. LO6 © 2016 McGraw ‐ Hill Education Limited 8.6 Is Economic Growth Desirable and Sustainable? 8-31

32. In Defense of Growth: It is the path to the greater material abundance and higher living standards desired by the vast majority of people. Economic growth has not made labour more unpleasant or hazardous. Growth has allowed economies to reduce pollution, and be more sensitive to environmental considerations. Growth is sustainable since economic growth has more to do with the expansion and application of human knowledge and information than extractable natural resources. LO6 © 2016 McGraw ‐ Hill Education Limited 8.6 Is Economic Growth Desirable and Sustainable? 8-32

33. The LAST WORD Can Economic Growth Survive Population Decline? © 2016 McGraw ‐ Hill Education Limited 8-33 The Demographic Transition Is Causing Greying Populations, Shrinking Labour Forces, and Overall Population Decreases in Many Nations. Can Economic Growth Survive? Real GDP = hours of work x labour productivity Hours of work depend on the size of the working-age population If working-age population falls, hours of work falls Labour productivity must increase faster than hours of work decreases for real GDP to rise Total fertility rate is below the replacement level for many nations In Canada, the inverse dependency ratio is set to fall from 1.5 in 2010 to 1.16 in 2050 Economists are uncertain if the increase in productivity is sufficiently large to keep standards of living from falling

34. LO8.1 List two ways that economic growth is measured. LO8.2 Define modern economic growth and explain the institutional structures needed for an economy to experience it. LO8.3 Identify the general supply, demand, and efficiency forces that give rise to economic growth. LO8.4 Describe growth accounting and specific factors accounting for economic growth in Canada. LO8.5 Explain the recent trend toward productivity acceleration. LO8.6 Discuss differing perspectives as to whether growth is desirable and sustainable. Chapter Summary © 2016 McGraw ‐ Hill Education Limited 8-34