1. ©2005 McGraw-Hill Ryerson Ltd. 1 Macroeconomics, Chapter 15 Economic Growth SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

2. ©2005 McGraw-Hill Ryerson Ltd.2Macroeconomics, Chapter 15 In this chapter you will learn 15.1 About the ingredients of economic growth 15.2 About production possibility analysis 15.3 About Canada’s economic growth rates 15.4 About the sources of Canada’s economic growth rates 15.5 About productivity growth 15.6 About the pros and cons of economic growth

3. ©2005 McGraw-Hill Ryerson Ltd.3Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

4. ©2005 McGraw-Hill Ryerson Ltd.4Macroeconomics, Chapter 15 Ingredients of Growth Supply FactorsSupply Factors –natural resources

5. ©2005 McGraw-Hill Ryerson Ltd.5Macroeconomics, Chapter 15 Ingredients of Growth Supply FactorsSupply Factors –natural resources –human resources

6. ©2005 McGraw-Hill Ryerson Ltd.6Macroeconomics, Chapter 15 Ingredients of Growth Supply FactorsSupply Factors –natural resources –human resources –capital goods

7. ©2005 McGraw-Hill Ryerson Ltd.7Macroeconomics, Chapter 15 Ingredients of Growth Supply FactorsSupply Factors –natural resources –human resources –capital goods –technology

8. ©2005 McGraw-Hill Ryerson Ltd.8Macroeconomics, Chapter 15 Supply FactorsSupply Factors –natural resources –human resources –capital goods –technology Demand FactorDemand Factor –households & businesses must purchase the economy’s output Efficiency FactorEfficiency Factor –economic efficiency & full employment Ingredients of Growth

9. ©2005 McGraw-Hill Ryerson Ltd.9Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

10. ©2005 McGraw-Hill Ryerson Ltd.10Macroeconomics, Chapter 15 Production Possibilities Analysis Growth & Production PossibilitiesGrowth & Production Possibilities Consumer goods Capital goods B A Economic growth Figure 15-1 a DCb

11. ©2005 McGraw-Hill Ryerson Ltd.11Macroeconomics, Chapter 15 The Supply Determinants of Real Output Size of employed labour forceSize of employed labour force Average hours of workAverage hours of work Labour inputs (hours of work) Technological advanceTechnological advance Quantity of capitalQuantity of capital Education and trainingEducation and training Allocative efficiencyAllocative efficiency OtherOther Labour productivity (average output per hours) X = Real GDP Figure 15-2 labour force participation rate

12. ©2005 McGraw-Hill Ryerson Ltd.12Macroeconomics, Chapter 15 Production Possibilities Analysis Growth in the AD-AS ModelGrowth in the AD-AS Model Capital goods B A Figure 15-3 DC Consumer goods Price level Real GDP Q1Q1Q1Q1 AS LR1 Q2Q2Q2Q2 AS LR2

13. ©2005 McGraw-Hill Ryerson Ltd.13Macroeconomics, Chapter 15 o P1P1P1P1 AD 1 AS 1 AS LR1 Q1Q1Q1Q1 Price Level Figure 15-4 Economic Growth in the Long-Run AD- AS Model Long-run & short-run AS increase over time

14. ©2005 McGraw-Hill Ryerson Ltd.14Macroeconomics, Chapter 15 o P1P1P1P1 AD 1 AS 2 AS 1 AS LR1 AS LR2 Q2Q2Q2Q2 Real GDP Q1Q1Q1Q1 Price Level Figure 15-4 Economic Growth in the Long-Run AD- AS Model Size of AD shift determines inflation

15. ©2005 McGraw-Hill Ryerson Ltd.15Macroeconomics, Chapter 15 o P1P1P1P1 AD 2 AD 1 P2P2P2P2 AS 2 AS 1 AS LR1 AS LR2 Q2Q2Q2Q2 Real GDP Q1Q1Q1Q1 Price Level Figure 15-4 Economic Growth in the Long-Run AD- AS Model

16. ©2005 McGraw-Hill Ryerson Ltd.16Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

17. ©2005 McGraw-Hill Ryerson Ltd.17Macroeconomics, Chapter 15 Canadian Economic Growth Real GDP in the last half century has increased over six foldReal GDP in the last half century has increased over six fold Growth particularly strong in the 1960s, but declined during the 1970s & 1980sGrowth particularly strong in the 1960s, but declined during the 1970s & 1980s Growth picked up in the closing years of the 1990sGrowth picked up in the closing years of the 1990s

18. ©2005 McGraw-Hill Ryerson Ltd.18Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

19. ©2005 McGraw-Hill Ryerson Ltd.19Macroeconomics, Chapter 15 Accounting for Growth in Canada Post-1950 productivity growth greater than can be attributed to increases in labour & capitalPost-1950 productivity growth greater than can be attributed to increases in labour & capital Two other factors:Two other factors: –shift of workers from relatively low-productivity farming to higher-productivity urban industry

20. ©2005 McGraw-Hill Ryerson Ltd.20Macroeconomics, Chapter 15 Accounting for Growth in Canada Post-1950 productivity growth greater than can be attributed to increases in labour & capitalPost-1950 productivity growth greater than can be attributed to increases in labour & capital Two other factors:Two other factors: –shift of workers from relatively low-productivity farming to higher-productivity urban industry –multifactor productivity (MFP) has increased, because of technological progress, organizational structure, economies of scale, regulation, entrepreneurship & risk-taking, labour-management relations, capacity utilization, & allocative efficiency

21. ©2005 McGraw-Hill Ryerson Ltd.21Macroeconomics, Chapter 15 Sources of Growth of Real GDP, 1961-2000 Table 15-1 Average Annual Rates of Real Growth (%) Contribution to Total Real Growth (%) Growth in 1961 -75 1975- 82 1982 -91 1961- 2000 1961 -75 1975 -82 1961- 2000 GDP5.22.52.83.9 Labour productivity 3.31.51.32.0 Capital/labour ratio 2.94.51.81.8 Input of labour 2.31.21.62.028.033.930.7 Input of capital 5.35.73.43.838.463.035.9 Multifactor Productivity 1.7-0.40.51.333.53.233.4

22. ©2005 McGraw-Hill Ryerson Ltd.22Macroeconomics, Chapter 15 Accounting for Growth in Canada Inputs Versus ProductivityInputs Versus Productivity –productivity growth has been a significant force in the growth of real GDP –productivity growth slowed from the mid- 1970s to early 1990s, but seems to have reversed in the last decade

23. ©2005 McGraw-Hill Ryerson Ltd.23Macroeconomics, Chapter 15 Accounting for Growth in Canada Quantity of LabourQuantity of Labour –both population & labour force have increased –immigration has helped offset lower birth rate –women’s participation rates have surged

24. ©2005 McGraw-Hill Ryerson Ltd.24Macroeconomics, Chapter 15 Accounting for Growth in Canada Technological AdvanceTechnological Advance –includes innovative production techniques & new managerial methods & forms of business organization

25. ©2005 McGraw-Hill Ryerson Ltd.25Macroeconomics, Chapter 15 Accounting for Growth in Canada Quantity of CapitalQuantity of Capital –almost 36% of the annual growth of real output since 1961 is attributable to increases in the quantity of capital –public investment in infrastructure also important

26. ©2005 McGraw-Hill Ryerson Ltd.26Macroeconomics, Chapter 15 Accounting for Growth in Canada Education & TrainingEducation & Training –educational attainment has increased –Canada ranks relatively highly on international standardized test scores

27. ©2005 McGraw-Hill Ryerson Ltd.27Macroeconomics, Chapter 15 Full-Time Post-Secondary Enrolment by Level, Relevant Population, 1974-1999 Figure 15-6

28. ©2005 McGraw-Hill Ryerson Ltd.28Macroeconomics, Chapter 15 Accounting for Growth in Canada Resource Allocation & Scale EconomiesResource Allocation & Scale Economies –economies of scale –improved resource allocation labour has shifted from manufacturing to even higher-productivity industries such as computer softwarelabour has shifted from manufacturing to even higher-productivity industries such as computer software discrimination has declineddiscrimination has declined trade has been liberalizedtrade has been liberalized

29. ©2005 McGraw-Hill Ryerson Ltd.29Macroeconomics, Chapter 15 Accounting for Growth in Canada Other FactorsOther Factors –the social-cultural-political environment has fostered growth –market system –stable political system –business success is respected –positive attitudes toward work & risk-taking

30. ©2005 McGraw-Hill Ryerson Ltd.30Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

31. ©2005 McGraw-Hill Ryerson Ltd.31Macroeconomics, Chapter 15 The Productivity Speedup: A New Economy? Some economists say that Canada has achieve a New Economy, with higher productivity growthSome economists say that Canada has achieve a New Economy, with higher productivity growth Reasons for Productivity SpeedupReasons for Productivity Speedup –The Microchip & Information Technology –New Firms & Increasing Returns more specialized inputsmore specialized inputs spreading of development costsspreading of development costs simultaneous consumptionsimultaneous consumption network effectsnetwork effects learning-by-doinglearning-by-doing –Global Competition

32. ©2005 McGraw-Hill Ryerson Ltd.32Macroeconomics, Chapter 15 Macroeconomic ImplicationsMacroeconomic Implications –More rapid economic growth –Low natural rate of unemployment –Growing tax revenues The Productivity Speedup: A New Economy?

33. ©2005 McGraw-Hill Ryerson Ltd.33Macroeconomics, Chapter 15 Skepticisms about the Permanence of the Productivity SpeedupSkepticisms about the Permanence of the Productivity Speedup –long-lived New Economy or rapid short-run expansion? What Can We Conclude?What Can We Conclude? –exceptional performance between 1995 & 2002 –prospects for a long-lived productivity speedup are good –time will tell The Productivity Speedup: A New Economy?

34. ©2005 McGraw-Hill Ryerson Ltd.34Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?

35. ©2005 McGraw-Hill Ryerson Ltd.35Macroeconomics, Chapter 15 Is Growth Desirable & Sustainable? The Antigrowth ViewThe Antigrowth View –environmental costs –distribution vs production –producing more & enjoying it less –sustainability

36. ©2005 McGraw-Hill Ryerson Ltd.36Macroeconomics, Chapter 15 Is Growth Desirable & Sustainable? In Defence of Economic GrowthIn Defence of Economic Growth –higher living standards –growth enables societal improvements –working conditions have improved –limiting growth not the solution to environmental problems –growth is sustainable

37. ©2005 McGraw-Hill Ryerson Ltd.37Macroeconomics, Chapter 15 Chapter 15 Topics 15.1 Ingredients of Growth 15.2 Production Possibilities Analysis 15.3 Canadian Economic Growth 15.4 Accounting for Growth in Canada 15.5 The Productivity Speedup: A New Economy? 15.6 Is Growth Desirable & Sustainable?