1. Chapter 12: Economic Growth

2. Economic Growth Rate: percentage change in Real GDP over the previous year. In 1992 prices, –Real GDP has grown from $2.3 trillion in 1960 to $8.9 trillion in 1999 (average annual growth rate of 3.4%) –Real GDP is expected to reach about $17 trillion in 2020 (at an average annual growth rate of 3.3%)

3. Economic Growth Real GDP growth rate averaged 3.4% in 1960- 1999 –Negative in 1970, 1974-75, 1980, 1982, 1991 –Over 3% in 1964-67, 1968, 1972-73, 1976-78, 1983-85, 1988-89, 1995-97

4. Business Cycles Short-run fluctuations of the Real GDP along the path of long-term growth, consisting of: –Expansion or Recovery –Peak or Boom –Contraction or Recession –Trough or Depression

5. Business Cycle Real GDP Time Peak Expansion Recession Trough Path of long-term growth

6. Identifying Business Cycle The Index of Leading Economic Indicators identifies the turning points of business cycles. It provides information about the state of the economy 4 to 6 months ahead. The Index of Leading Economic Indicators includes –stock market prices, real money supply, consumer expectations, interest rate, manufacturing workweek, unemployment claims, building permits, consumer & capital goods order, inputs delivery performance

7. Theories of Business Cycle Expectations: business optimism & pessimism Innovations: risk-taking for monopoly profit Inventory: inventory adjustment lag Real: fluctuations of long-run actual along potential GDP Exogenous: outside events & shocks

8. Economic Resources Human or Labor: physical & mental efforts of workers in production of goods & services Capital: goods used in production of other goods (e.g., tools, equipment, buildings) Natural: gifts of the nature (e.g., water, minerals)

9. Determinants of Growth Availability of resources: human, capital, natural Human capital investment : education, skills Physical capital investment Technological advancement Social capital investment & infrastructure Efficient and democratic government International relations

10. Economic Growth Good x 100 90 60 72 A B Good y Economic growth is illustrated by an outward shift of the PPC

11. Reasons for Growth Slowdown Labor Force –Need education and on-the-job-training –Have part-time or temporary jobs Saving and Investment –Low saving ratio: about 15% of GDP –Slow capital accumulation

12. Reasons for Growth Slowdown Composition of Output –Shift of resources from high-productivity capital goods to low- productivity consumer goods Government –Stringent regulations –Large and growing public debt