1. 10/22/20141 GDP and Economic Growth Chapter 05

2. 10/22/20142 Outline Gross Domestic Product Gross Domestic Product Economic Growth Economic Growth

3. 10/22/20143 Economic Growth General Information General Information Ingredients of Growth Ingredients of Growth Production Possibilities Analysis Production Possibilities Analysis Accounting for Growth Accounting for Growth The Recent Productivity Acceleration The Recent Productivity Acceleration Is Growth Desirable and Sustainable? Is Growth Desirable and Sustainable?

4. 10/22/20144 Economic Growth An increase in real GDP over time or an increase in real GDP per capita over time An increase in real GDP over time or an increase in real GDP per capita over time GDP per capita = GDP / Population = Output per person GDP per capita = GDP / Population = Output per person

5. 10/22/20145 Economic Growth Growth as a goal Growth as a goal –Growth lessens the burden of scarcity. –A growing economy can consume more today and yet can produce/consume more in the future. –Indications: rising real wages and incomes, higher living standards, less poverty, better environment.

6. 10/22/20146 Economic Growth Arithmetic of growth Arithmetic of growth –(Annual) growth rate y (%) = %  Y = [(Y 2 – Y 1 ) / Y 1 ] * 100 –Rule of 70 (if y < 3%) Approx. # years to double Y = 70 / (y * 100) –Rule of 72 (if y > 3%) Approx. # years to double Y = 72 / (y * 100) Approx. # years to double Y = 72 / (y * 100)

7. 10/22/20147 Economic Growth An example – 3 hypothetical countries in 2008 An example – 3 hypothetical countries in 2008 Y = $6 trillion; Population = 200 million; Real GDP per capita = $30,000 Y = $6 trillion; Population = 200 million; Real GDP per capita = $30,000 Year SlogoSumgoSpeedo 20082%3%4% Annual economic growth rate = y (%) 2078$24$48$96 Real GDP = Y ($trillion) 2078$60,000$120,000$240,000 Annual population growth = 1% Real GDP per capita ($)

8. 10/22/20148 Economic Growth An example – The U.S. Y = $12 trillion An example – The U.S. Y = $12 trillion Year U.S. 20082%3%4% Annual economic growth rate = y (%) 2009$12.24$12.36$12.48 Real GDP ($trillion) 2009$24$36$48 Change in real GDP ($billion)

9. 10/22/20149 Economic Growth Growth in the U.S. Growth in the U.S.

10. 10/22/201410 Economic Growth Ingredients of Growth Ingredients of Growth –Supply factors –Demand factors –Efficiency factors

11. 10/22/201411 Economic Growth Ingredients of Growth Ingredients of Growth –Supply factors  Increases in quantity and quality of natural resources  Increases in quantity and quality of human resources  Increases in the supply (or stock) of capital goods  Improvement in technology

12. 10/22/201412 Economic Growth Ingredients of Growth Ingredients of Growth –Demand factor - Households, businesses, and governments must purchase the expanding output of G&S. –Efficiency factor - The economy must achieve  Productive efficiency (least-cost production)  Allocative efficiency (optimal mix to maximize people’s well-being)  Full employment

13. 10/22/201413 Economic Growth Production Possibilities Analysis Production Possibilities Analysis –Growth and production possibilities –Inputs and productivity

14. 10/22/201414 Growth and production possibilities Consumer goods PPC a c CapitalgoodsCapitalgoods PPC’ b Supply factors shift the PPC out to PPC’. Demand and efficiency factors move the economy from a to b (optimal points). Economic growth is realized. Economic growth is not realized at point c.

15. 10/22/201415 Economic Growth Real GDP = Real GDP = input of labor (hours of work) input of labor (hours of work) x labor productivity (real output per hour of work) labor productivity (real output per hour of work)

16. 10/22/201416 Economic Growth Real GDP= Labor inputs (hours of work) Labor productivity (average output per hour) Size of employed labor force Average hours of work per week Technological advance Quantity of capital Education and training Allocative efficiency Others X

17. 10/22/201417 Economic Growth Accounting for Growth Accounting for Growth –Increases in hours of work (labor inputs)

18. 10/22/201418 Economic Growth Accounting for Growth Accounting for Growth –Increases in labor productivity  Technological advance  Quantity of capital, e.g. infrastructure  Education and training (human capital)

19. 10/22/201419 Economic Growth Accounting for Growth Accounting for Growth

20. 10/22/201420 Economic Growth Accounting for Growth Accounting for Growth –Increases in labor productivity  Economies of scale and resource allocation  Institutional structures that promote growth  Other factors

21. 10/22/201421 Economic Growth Accounting for Growth Accounting for Growth –Increases in labor productivity  Economies of scale and resource allocation –Reduction in per-unit production cost that results from increases in the size of markets and firms –Over time workers move from low-productivity employment, e.g. agriculture, to high-productivity employment, e.g. manufacturing or service

22. 10/22/201422 Economic Growth Accounting for Growth Accounting for Growth –Institutional structures that promote growth  Strong property rights  Patents and copyrights  Efficient financial institutions  Free trade  A competitive market system

23. 10/22/201423 Economic Growth Accounting for Growth Accounting for Growth –Other factors -- Social-cultural-political environment  Economic freedom  Political freedom

24. 10/22/201424 U.S. Labor Productivity Since Mid-90s

25. 10/22/201425 Economic Growth The Recent Productivity Acceleration The Recent Productivity Acceleration –Statistics:  1973-1995: 1.4% per year  1995-2007: 2.7% per year  2006: 1%  2007: 1.9% –Reasons:  The microchip and information technology  New firms and increasing returns  Global competition

26. 10/22/201426 Economic Growth The Recent Productivity Acceleration The Recent Productivity Acceleration –Implication: more rapid economic growth –Skepticism about permanence  A “wait-and-see” attitude –What can we conclude?  Prospects for a lasting increase in productivity are good.  Time will tell.

27. 10/22/201427 Economic Growth Is Growth Desirable and Sustainable? Is Growth Desirable and Sustainable? –The antigrowth view  Problems: pollution, global warming, ozone depletion, other environmental problems  Social problems, e.g. poverty, homelessness, discrimination, etc. persist.  We do not have a “good life,” e.g. more stress, burnouts, etc.  Growth may not be sustainable, due to resource depletion

28. 10/22/201428 Economic Growth The Is Growth Desirable and Sustainable? The Is Growth Desirable and Sustainable? –In defense of economic growth  Greater material abundance  Higher living standards  Environment not debased  No indication that resources are running out  Human imagination is key

29. 10/22/201429 Economic Growth in China Annual average growth rates (past 25 years) Annual average growth rates (past 25 years) –9% (real GDP) –8% (real GDP per capita) Sources of this growth Sources of this growth –More productive labor –More international trade –Transition to a market economy –Member of WTO (2001) Challenges Challenges –Weak financial system –Income inequality across geographic areas

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