1. Economic Growth

2. What is Economic Growth?
An increase in real GDP over time
An increase in real GDP per capita over time (usually used to measure improvement in standard of living)
Why is economic growth the goal of every society?
More and better goods and services
Lower unemployment and higher wages
Fewer social problems
Better quality of life

3. Top 10 Countries – Human Development Index

4. Bottom 10 - HDI

5. Economic Growth on the Graph

6. On the Production Possibilities Curve
Guns
Butter 6

7. LRAS LRAS2 On the Aggregate Supply/Demand Graph Price Level QY Q2 GDPR7

8. Comparing Economies Across Time and Space
Real GDP per capita (log scale)
$100,000
10,000
1,000
Year

9. US Real GDP per Capita since 1914
Year
Percentage of 1914 real GDP per capita
Percentage of 2014 real GDP per capita
1914
100%
16%
1934
129 21
1954
175 28
1974
283 46
1994
430 69
2014
620
100
Table 25-1: U.S. Real GDP per Capita Percentage
Source: Angus Maddison, Statistics on World Population, GDP, and Per Capita GDP, 1–2006AD, Bureau of Economic Analysis

10. Income Around the World, 2014
Figure Caption: Figure 25-2: Incomes Around the World, 2007
Although the countries of Europe and North America—along with a few in the Pacific—have high incomes, much of the world is still very poor. Today, more than 50% of the world’s population lives in countries with a lower standard of living than the United States had a century ago.
Source: International Monetary Fund.

11. The Importance of Growth Rates
How did U.S. output increase six-fold in just 100 years?
A little bit at a time.
Long-run economic growth is a gradual process
From 1914 to 2014, real GDP per capita in the United States grew by an average of 1.8% per year.

12. Growth Rates Average annual growth rate of real GDP per capita,
10% 8 6 4 2 -2
8.7%
4.1%
4.1%
2.0%
Figure Caption: Figure 25-3: Comparing Recent Growth Rates
Here the average annual rate of growth of real GDP per capita from 1980 to 2007 is shown for selected countries. China and, to a lesser extent, India and Ireland have achieved impressive growth. The United States and France have had moderate growth. Despite having once been considered an economically advanced country, Argentina has had sluggish growth. Still others, such as Zimbabwe, have slid backward.
Source: International Monetary Fund.
1.5%
0.8%
-1.4%
China
India
Ireland
United States
France
Argentina
Zimbabwe

13. What makes an economy grow in the long run?
Increases in the productivity of its workers
Called labor productivity
What makes workers more productive?
Increases/improvements in
the following:
Physical Capital
Human Capital
Technology

14. 1. Physical capital: Man-made resources (e. g
1. Physical capital: Man-made resources (e.g. buildings, machines, and tools)
Public physical capital (e.g. highways) is called infrastructure
The amount of physical capital in an economy is sometimes called the country’s capital stock
Access to more (and better) buildings, tools, and machines will make workers more productive

15. Depreciation is the decrease in value of capital over time
Machines, tools, buildings eventually wear out
Gross investment minus depreciation = real net investment

16. 2. Human capital: The knowledge, skills, and abilities of the labor force
Higher levels of education and training lead to higher productivity
Rich countries tend to be highly educated

17. Education and GDP

18. 3. Technology – the techniques, methods, and processes used to produce goods and services
Improvements in technology in the long run come from research and development (R&D)

19. Increases in capital (both physical and human), and improvements in technology are made possible by higher rates of saving
Higher saving => sustainable lower interest rates => more spending by firms on investment (capital goods, job training, and R&D)
Foreign investment achieves same result as saving

20. Review
By about how much has U.S. real GDP per capita grown over the last 100 years?
What was the average annual real GDP per capita growth rate over that period?
Increases in per capita income over time are caused by increases in labor ___________.
Increases or improvements in what three factors lead to increases in labor productivity?

21. Physical capital provided by the government is called ____________
Review
The amount of physical capital in an economy is sometimes called the ________________.
A decrease in the value of physical capital over time is called ______________
Physical capital provided by the government is called ____________
Advances in technology in the long run come from _________________________

22. Review
In the long run, spending on physical capital, training/education, and research and development must come from ____________

23. What Does Long-Run Economic Growth Look Like on This Graph?
LRAS
LRAS2
Price Level QY Q2
GDPR 23

24. Why Growth Rates Differ
Economic growth varies dramatically between countries. Why?
Mostly due to differences in quality of governments
Bad governments slow growth while good ones promote growth

25. The Role of Government in Promoting Economic Growth
Political stability and protection of property rights are crucial ingredients of long-run economic growth.
Excessive government intervention can slow growth
If government protects and pampers favored industries with subsidies and high tariffs, productivity suffers

26. The Role of Government in Promoting Economic Growth
Political stability and protection of property rights are crucial ingredients of long-run economic growth.
Excessive government intervention can slow growth
If government protects and pampers favored industries with subsidies and high tariffs, productivity suffers