1. PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 5 The Theory of Economic Growth

2. Copyright © 2004 South-Western. All rights reserved.5–2 Fundamental Issues 1.How do economists measure economic growth? 2.What key factors determine the rate of economic growth? 3.How does labor-force participation affect economic growth? Do population growth and immigration increase or reduce economic growth?

3. Copyright © 2004 South-Western. All rights reserved.5–3 Fundamental Issues (cont’d) 4.How do changes in labor productivity influence economic growth? 5.Why are saving and capital investment important for economic growth? 6.What role does human knowledge play in economic growth? Is growth self- perpetuating?

4. Copyright © 2004 South-Western. All rights reserved.5–4 Source: World Bank. Table 5–1 Average Per Capita Growth Rates in Selected Countries, 1965–Present (%)

5. Copyright © 2004 South-Western. All rights reserved.5–5 Table 5–2 One Dollar in Real Income Per Capita Compounded Annually at Different Growth Rates

6. Copyright © 2004 South-Western. All rights reserved.5–6 Source: International Monetary Fund, World Economic Outlook, various issues. Table 5–3 Economic Growth Rates in Selected Industrialized Nations (%) NOTE: Figures are average annual percentage changes in per capita real GDP.

7. Copyright © 2004 South-Western. All rights reserved.5–7 Source: Economic Report of the President, 2002; Economic Indicators (various issues). Figure 5–1 Real GDP Per Capita and Year-to-Year Changes in Real GDP Per Capita in the United States

8. Copyright © 2004 South-Western. All rights reserved.5–8 Sources: Economic Report of the President, 2002; Economic Indicators (various issues). Table 5–4 Slowed Economic Growth Rates in the United States NOTE: Figures are percentage changes in per capita real GDP.

9. Copyright © 2004 South-Western. All rights reserved.5–9 A Nation’s Overall Output Growth Over a Year’s Time As the Sum of Three Components

10. Copyright © 2004 South-Western. All rights reserved.5–10 Figure 5–2 The Effects of a Rise in Labor- Force Participation on the Equilibrium Money Wage, Employment, Aggregate Supply, and Real Output

11. Copyright © 2004 South-Western. All rights reserved.5–11 Source: Mohain Khan and Abdelhak Senhadji, “Threshold Effects in the Relationship between Inflation and Growth,” IMF Staff Papers 48 (January 2001): 1–21. Figure 5–3 GDP Growth and Inflation for 140 Countries

12. Copyright © 2004 South-Western. All rights reserved.5–12 Figure 5–4 The Effects of a Rise in the Marginal Product of Labor on Employment and Real Output

13. Copyright © 2004 South-Western. All rights reserved.5–13 Source: International Monetary Fund, World Economic Outlook, April 2002. Figure 5–5 Employment Growth and Output Growth in the United States

14. Copyright © 2004 South-Western. All rights reserved.5–14 Figure 5–6 Capital Accumulation and Growth in Real Output

15. Copyright © 2004 South-Western. All rights reserved.5–15 Figure 5–7 The Marginal-Product-of-Capital (MPK) Schedule

16. Copyright © 2004 South-Western. All rights reserved.5–16 Figure 5–8 The Real Interest Rate and the Investment Schedule

17. Copyright © 2004 South-Western. All rights reserved.5–17 Figure 5–9 Desired Investment and a Rise in the Marginal Product of Capital

18. Copyright © 2004 South-Western. All rights reserved.5–18 Figure 5–10 The Effect on Equilibrium Investment of a Rise in Saving

19. Copyright © 2004 South-Western. All rights reserved.5–19 Sources: Louis Uchitell, “Not Making It: We’re Leaner, Meaner, and Getting Nowhere Fast,” New York Times, May 12, 1996, p. 1; Economic Report of the President, 2002. Figure –11 Overall Productivity in the United States, 1870–Present

20. Copyright © 2004 South-Western. All rights reserved.5–20 Source: Evan Koenig, “Productivity, the Stock Market, and Monetary Policy in the New Economy,” Federal Reserve Bank of Dallas Southwest Economy, January/February 2000, pp. 6–12. Figure 5–12 Actual and Predicted Productivity Growth