My Class Notes

SUBJECT: ECONOMICS CH28 DATE: 03/01/24

ECONOMIC GROWTH
CHAPTER 28

ECONOMIC GROWTH
two ways that economic growth is measured.

How is economic growth measured

1. Real GDP Growth:
Increase in real GDP over a specified time period.
Calculated as a percentage rate of growth per quarter or per year.
Example: U.S. economic growth rate in 2015 was 2.4%, calculated as [(16,348.9 -
15,961.7) / 15,961.7] × 100.
[PRESENT GDP-PAST GDP/PAST GDP]
2. Real GDP per Capita Growth:
Increase in real GDP per capita over a specified time period.
Takes population size into consideration.
Example: U.S. real GDP per capita growth in 2015 was 1.7%, calculated as [($50,820 -
$49,974) / $49,974] × 100.
Comparing Growth Definitions:
Military and Political Perspective:
Growth of real GDP is more useful.
Used for measuring expansion of military potential or political preeminence.
Living Standards Perspective:
Real GDP per capita is superior.
Important for comparing living standards among countries.
Example: Comparing China's GDP with Denmark's real GDP per capita.

Cautionary Note on Growth Statistics:

Real GDP growth may be misleading without considering population growth.
Example: Eritrea's real GDP growth of 1.3% per year, but declining real GDP per capita due
to population growth.

Growth as a Goal:
Widely Held Economic Goal:
Economic growth results in rising real wages, incomes, and higher living standards.
Enables a nation to meet people's wants and resolve socioeconomic problems.
Benefits of Economic Growth:
Richer opportunities for individuals and families.
Ability to undertake new programs without impairing existing levels of consumption.
Easing the Burden of Scarcity:
Growth lessens the burden of scarcity by increasing production capacity.
Enables a nation to attain economic goals more readily.
can consume more today while increasing its capacity to produce more in the future.

Arithmetic of Growth:
Significance of Small Changes:
Small changes in the rate of economic growth matter significantly.
Example: The difference between a 3% and 4% growth rate for the U.S. is about $179
billion of output each year.
Rule of 70:
Mathematical approximation to estimate the number of years required for a measure
to double.
 Example: A 3% annual growth rate will double real GDP in about 23 years.

Impact on Different Countries:

Illustration of how differences in growth rates impact GDP doubling time for China
and Italy.
Suppose China and Italy start with identical GDPs, but then China grows at an 8
percent yearly rate, while Italy grows at 2 percent. China’s GDP would double in
about 9 years, while Italy’s GDP would double in 35 years.

Overview of U.S. Economic Growth (1950-2015):

Real GDP Growth:

Column 2 shows strong growth with real GDP increasing more than sevenfold between
1950 and 2015.
Annual rate of real GDP growth was about 3.1%.

Population Growth:

Despite population growth, real GDP per capita (column 4) rose more than threefold
over the same period.

Rate of U.S. Growth:

 Real GDP grew at an annual rate of about 3.1%.
Real GDP per capita increased at roughly 2.0% per year.

Qualifications to Growth Numbers:

Improved Products and Services:

Numbers may understate growth due to advancements in products and services.
Technological progress, moving from vacuum tube computers to digital cell phone
networks, is not fully captured.
Added Leisure:
Despite increased leisure (average workweek reduced from 50 to 35 hours), growth
in real GDP and per capita GDP is noted.
More leisure = less production so why did GDP increase?
Raw growth numbers understate the gain in economic well-being.
Other Impacts:
Growth measures do not account for environmental and quality of life impacts.
Growth may lead to environmental degradation or improvements, impacting
overall well-being.

Environmental Considerations:

The growth numbers may overstate gains if growth negatively affects the physical
environment, excessively warms the planet, or creates stressful work environments.
Conversely, if growth results in stronger environmental protections or a more secure
lifestyle, the numbers may understate gains.

Variability in Growth Rates:

U.S. growth rates are not constant or smooth over time.

Quarterly and annual variations occur due to factors like major inventions and the
current position in the business cycle.

Global Perspective:

Positive and ongoing economic growth is not unique to the U.S.; many countries
experience it.
Sustained growth is historically new and not evenly shared among all countries.
 Modern Economic
Growth
Define “modern economic growth” and explain
the institutional structures needed for an
economy to experience it.

Historical Context of Economic Growth:

Modern Economic Growth:

modern economic growth is characterized by sustained and ongoing increases in living

standards that can cause dramatic increases in the standard of living within less than a
single human lifetime.

Industrial Revolution (Late 1700s):

Historical turning point for economic growth.

Initiated with James Watt's steam engine in 1776.
Mass production, steamships, and steam locomotives transformed manufacturing and
transportation.

Technological Progress Over Two Centuries:

Evolution from steam power to electric power and subsequent inventions like
railroads, motorized vehicles, telephones, airplanes, computers, and the Internet.
The last 200 years marked by sustained increases in living standards and constant
exposure to new technologies.

Impact on Cultural, Social, and Political Aspects:

Cultural Impact:
Vast increases in wealth and living standards enable significant time for leisure
activities and the arts.
Social Impact:
Abolition of feudalism, universal public education, elimination of social norms and
legal restrictions against women and minorities in certain roles.
Political Impact:
Shift towards democracy, a rare form of government before the Industrial
Revolution.
Increased Human Lifespan:

Average human lifespan more than doubled from less than 30 years before the
Industrial Revolution to over 71 years worldwide today.

Uneven Distribution of Growth:

Spread of Modern Economic Growth:

Spread slowly from its British birthplace.

Advanced to Western Europe, the United States, Canada, and Australia by the mid-
1800s.
Japan industrialized in the 1870s, followed by other parts of Asia, Central and South
America, and the Middle East in the early to mid-1900s.
Africa experienced modern economic growth more recently.

Different Starting Dates Impact Per Capita GDP:

Different starting dates for modern economic growth explain vast differences in per
capita GDP levels.
 because western Europe and the United States started experiencing modern
economic growth earlier than other areas, they have now ended up vastly richer than
other areas, despite the fact that per capita incomes in nearly all places have
increased at least a bit
Figure 28.1 shows the evolution of GDP per capita since 1820 in various regions.

Catch-Up Possibility:
Countries that began modern economic growth more recently are not condemned to
permanent poverty.
Poorer follower countries can adopt existing technologies from richer leader countries,
leading to rapid increases in living standards.

1.) Technological Progress Constraints:

Growth rates of leader countries (U.S., U.K., France) constrained by the rate of
technological progress, typically 2-3% per year.
Leader countries need to innovate but they innovate slow while follower countries, due
to globalization, just get the shit from leader countries

2.) Follower Countries' Growth Potential:

Follower countries can grow faster, adopting advanced technologies.

Rapid growth until they catch up with leader countries.
Table 28.2 - Growth Comparisons:
 Compares GDP per capita and growth rates between leader (U.S., U.K., France) and
follower countries (Ireland, Hong Kong, South Korea, etc.) between 1960 and 2010.
Demonstrates how follower countries' faster growth can lead to catching up with
or even surpassing leader countries.

3.) Labor Supply Differences:

Differences in labor supply contribute to variations in GDP per capita.

U.S. citizens work more hours than those in other rich leader countries.
Possible Explanations:
Cultural differences.
Stronger unions in other rich leader countries.
More generous unemployment and welfare programs.
Higher tax rates and shorter legal workweeks in other countries.

Institutional Structures Promoting Modern Economic

Growth:
1. Strong Property Rights:
Necessary for rapid and sustained economic growth.
Investors need confidence that their investments and returns won't be stolen.
2. Patents and Copyrights:
Provide inventors and authors exclusive rights to market and sell their creations.
Strong financial incentives for invention and creation.
3. Efficient Financial Institutions:
Channel savings towards businesses, entrepreneurs, and inventors.
Banks, stock markets, and bond markets crucial for modern economic growth.
4. Literacy and Widespread Education:
Highly educated inventors are essential for technology development.
A well-educated workforce is crucial for implementing and utilizing new technologies.
5. Free Trade:
Promotes economic growth by allowing specialization based on comparative
advantage.
Facilitates the rapid spread of new ideas and innovations across countries.
6. Competitive Market System:
Prices and profits in a market system guide firms in production decisions.
Firms, even with varying levels of government regulation, follow market signals for
current production and future investments.

Difficult-to-Measure Factors Influencing Growth:

1. Overall Social-Cultural-Political Environment:
Factors beyond direct economic structures impact growth.
Economic and political freedom are considered "growth-friendly."
Stable political system.
Democratic principles.
Internal order.
Right of property ownership.
Legal status of enterprise.
Contract enforcement.
2. Social and Moral Attitudes:
Encourages economic growth.
Wealth creation is seen as an attainable and desirable goal.
High prestige and respect for inventors, innovators, and businesspersons.
No social or moral taboos on production and material progress in the United
States.
Positive social philosophy embracing wealth creation.
High prestige for inventors, innovators, and businesspersons.
3. Positive Attitude toward Work and Risk-Taking:
Americans show a positive attitude.
Encourages a willing workforce and innovative entrepreneurship.
Immigration contributes to the supply of energetic workers.
 DETERMINANTS OF
GROWTH
Identify the general supply, demand, and efficiency
forces that give rise to economic growth.

Determinants of Economic Growth:

1. Supply Factors:
Natural Resources:
Quantity and quality matter.
Availability of raw materials, energy sources, and environmental sustainability.
Enhancements or discoveries in these resources contribute to economic growth.
Human Resources:
Quantity and quality of the workforce.
Education, skills, health, and overall well-being of the population.
Investing in human capital through education and training.
Capital Goods:
Stock of capital goods (machinery, equipment, infrastructure).
Accumulation and improvement of capital contribute to increased production
capacity.
Technology:
Innovations and advancements.
Research and development, technological progress.
Enhancing efficiency, productivity, and the introduction of new products.

2.Demand Factor:

Consumer, Business, and Government Spending:

Expansion of purchases to match increased production potential.
Total spending must increase to absorb the higher output produced by enhanced
supply factors.
Ensuring no unplanned increases in inventories and maintaining full resource
utilization.

3.Efficiency Factor:

Economic Efficiency:
Efficient use of resources.
Productive efficiency: Least costly production.
 Allocative efficiency: Producing the mix of goods and services maximizing well-being.
Ensures resources are used effectively to achieve full production potential.

Interrelation of Factors:
Supply, Demand, and Efficiency:
Unemployment due to insufficient spending affects new capital accumulation and
research expenditure (supply factors).
Low spending on investment may lead to unemployment (demand factor).
Inefficiency in resource use can result in higher costs, lower profits, and hinder
innovation and capital accumulation (interconnectedness of factors).
Dynamic Interaction:
Economic growth is dynamic, involving interactive relationships among supply,
demand, and efficiency factors.
A holistic approach is necessary to understand and foster sustained economic growth.

Production Possibilities Analysis and Growth:

Production Possibilities Curve:

Representation: Curve AB in Figure 28.2 represents a production possibilities curve.

 Significance: Illustrates the maximum combinations of products an economy can
produce with its fixed resources and technological knowledge.

Growth Perspective:
Curve Outward Movement (AB to CD):
Improvement in any supply factor (natural resources, human resources, capital goods,
technology) pushes the production possibilities curve outward.
Increased potential size of the economy's GDP.
Demand Factor Influence:
Total spending increase needed to move from a point on curve AB to any point on the
higher curve CD.
Demand factor emphasizes the importance of increased purchases for the higher
production potential to be realized.
Efficiency Factor Consideration:
Efficiency factor highlights the need for least-cost production and optimal resource
allocation.
Optimal combination occurs at point b on curve CD, assuming efficient use of
resources.

Example - Labor Force Increase:

Scenario: Net increase in the U.S. labor force.
Effect: Raises production capacity.
Dependency: Actual output gain depends on job availability, appropriate utilization of
talents, and avoidance of unemployment.
Outcome Possibilities:
Desired Outcome (Point b):
Full employment, optimal utilization of talents.
Economic production at its best allocation on the expanded curve CD.
Undesirable Outcome (Point c):
Occurred during the severe recession of 2007–2009.
Real output fell below the potential if full employment and efficient production
were achieved.

Labor and Productivity:

Society can increase its real output and income in two fundamental ways: (1) by
increasing its inputs of resources and (2) by raising the productivity of those inputs.
. A nation’s real GDP in any year depends on the input of labor (measured in hours of
work) multiplied by labor productivity (measured as real output per hour of work):
Components of Real GDP Formula:
 Economic growth depends on the increase in labor inputs and labor productivity.
Illustration - Ziam's Economy:
Year 1:
10 workers, each working 2,000 hours/year.
Productivity = $10.
Real GDP = $200,000.
Year 2:
Hours of work increase to 20,200.
Productivity rises to $10.40.
Real GDP = $210,080.
Economic Growth Rate:
About 5 percent.
(210K-200K/200K) X 100

Factors Influencing Labor Inputs and Productivity:

Hours of Work Determinants:

Dependent on the employed labor force size, average workweek length.
 Labor-force size influenced by working-age population and labor-force participation
rate —the percentage of the working-age population actually in the labor force.
Average workweek length determined by legal, institutional, and collective bargaining
factors.
Labor Productivity Determinants (Figure 28.3):
Influenced by technological progress, capital goods availability, quality of labor, and
efficiency in resource allocation.
Rises with improvements in worker health, training, education, motivation, better
machinery, efficient production organization, and reallocation to more efficient
industries

ACCOUNTING FOR
GROWTH
Describe “growth accounting” and the specific factors
accounting for economic growth in the United States.

Growth Accounting Framework:

The President’s Council of Economic Advisers uses growth accounting to evaluate the
importance of supply-side elements contributing to changes in real GDP.
The elements are grouped into two main categories:
a. Increases in hours of work.
b. Increases in labor productivity.

Labor Inputs vs. Labor Productivity:

Both quantity (hours of work) and quality (labor productivity) of labor are vital for
economic growth.
Between 1953 and 2015, the U.S. experienced significant growth in the labor force, partly
due to increased immigration and women’s participation in the workforce.
Labor productivity growth has been a more significant factor in economic growth,
contributing to 88% of GDP growth between 2015 and 2026.

Factors Influencing Productivity Growth:

1. Technological Advance (40%):
Major contributor to productivity growth.
Involves innovative production techniques, managerial methods, and new forms of
business organization.
Promotes investment in new machinery and equipment.
 Examples include advancements in computers, wireless communication, and the
Internet.
2. Quantity of Capital (30%):
Increased capital makes workers more productive.
Capital goods are complementary to labor.
Public and private investment in infrastructure and technology contributes to
economic growth.
3. Education and Training (15%):
Investment in human capital, including formal education and on-the-job training.
Contributes to increased labor productivity and earnings.
Gains in educational attainment over decades positively impact labor quality.
4. Economies of Scale (7.5%):
Reductions in per-unit production costs due to increased output levels.
Larger markets allow firms to use more productive equipment and methods.
Examples include efficient assembly lines in large manufacturing firms.
5. Resource Allocation (7.5%):
Workers shifting from low-productivity to high-productivity employment.
Historical shifts from agriculture to manufacturing and recent shifts to high-
productivity industries.
Reduction of discrimination and trade barriers improving resource allocation.

Recent Fluctuations in the

Average Rate of
Productivity Growth
average rate of U.S. productivity growth has
fluctuated since 1973.

Labor Productivity Trends:

 Figure 28.5 illustrates the growth of labor productivity in the United States from 1973 to
2015.
Labor productivity growth fluctuated, with a notable increase between 1995 and 2010,
attributed to technological advances, global competition, and entrepreneurship.
The period post-2010 witnessed a significant slowdown in productivity growth, leading to
various hypotheses.

Reasons for the Rise in the Average Rate of Productivity

Growth between 1995 and 2010
1. Microchip Revolution:
The microchip, bundling transistors on silicon, led to significant entrepreneurship and
innovation.
Microchip applications ranged from pocket calculators to personal computers,
laptops, and various electronic devices.
The widespread availability of personal computers stimulated Internet development,
fostering electronic commerce (e-commerce).
2. New Firms and Increasing Returns:
Hundreds of new start-up firms contributed to the information technology boom.
Successful firms like Intel, Apple, Microsoft, and Google capitalized on increasing
returns, experiencing rapid growth.
Increasing returns result in higher productivity and reduced per-unit production
costs, exemplifying economies of scale.
Sources of Increasing Returns:
More Specialized Inputs: Use of highly specialized and productive capital and
workers.
Spreading of Development Costs: Spreading high product development costs over
greater output.
 Simultaneous Consumption: Products and services satisfying large numbers of
customers simultaneously.
Network Effects: Products becoming more beneficial with an increasing user base.
Learning by Doing: Firms gaining efficiency and productivity through experience.
3. Global Competition:
Information technology and global competition reshaped the economy.
Collapse of socialist economies and market system success led to global capitalism
resurgence.
Free-trade agreements, such as NAFTA and the European Union, increased
competition internationally.

Implications for Economic Growth:

Stronger productivity growth and increased global competition contribute to higher
economic growth rates.
The combination of economic efficiency, heightened competition, and productivity
growth leads to an improved living standard.

Recent Productivity Slowdown (Post-2010):

Productivity growth rates sharply declined after the Great Recession, raising concerns.
Possible Explanations:
High Debt Levels: Accumulated debts may hinder productive investments as
individuals and firms focus on debt reduction.
Overcapacity: Worldwide overcapacity from pre-recession investments may
discourage new productive investments.
Non-Measurable Product Impact: Measuring productivity may be challenging for
products like Internet apps that offer free services, causing a disconnect between
innovation and GDP statistics.
Stalled Technological Progress: A hypothesis suggesting a slowdown in technological
progress until invention and innovation accelerate again.

Is Growth Desirable and

Sustainable?
differing perspectives as to whether growth is
desirable and sustainable

Antigrowth View: Criticisms and Concerns

Environmental Issues:
 Negative Externalities: Critics argue that industrialization and economic growth result
in environmental problems like pollution, climate change, and ozone depletion.
Waste Generation: As production inputs reenter the environment as waste, rapid
growth and higher living standards lead to increased environmental stress.
Trivial Wants vs. Ecological Threats: Antigrowth proponents claim that further growth
often satisfies trivial wants at the cost of escalating threats to the ecological system.

Sociological Problems:

Poverty and Discrimination: Critics question the effectiveness of economic growth in

solving sociological issues such as poverty, homelessness, and discrimination.
Distribution vs. Production: For antigrowth advocates, poverty is viewed as a
distribution problem rather than a lack of production. Redistributing wealth and
income is considered more crucial than further output increases.

Quality of Life Concerns:

The Good Life vs. Better Living: Antigrowth sentiment suggests that growth may
enhance material abundance but not necessarily contribute to a "good life." Concerns
include stressful work environments, worker burnout, and alienation due to fast-
paced growth.
Anxieties and Insecurities: Changing technology associated with growth introduces
new anxieties and insecurities for workers, potentially rendering their skills obsolete.

Sustainability Doubts:

Finite Resources: Critics question the sustainability of high growth rates, highlighting
the finite availability of natural resources on Earth.
Environmental Degradation: Higher growth rates are seen as accelerating the
degradation and exhaustion of the planet's resources.

In Defense of Economic Growth: Advocates' Perspectives

Material Abundance and Living Standards:

Desired by Majority: Economic growth is defended as the path to greater material

abundance and higher living standards, fulfilling the aspirations of the majority.
Expanded Choices: Rising output and incomes enable people to access more
education, recreation, travel, healthcare, and other services, contributing to an
improved quality of life.

Social Development and Infrastructure:

Societal Improvements: Growth facilitates societal improvements, including better

infrastructure, healthcare for the sick and elderly, enhanced accessibility for the
disabled, and increased police and fire protection.
Poverty Reduction: Economic growth is considered essential for poverty reduction,
especially when limited political support exists for income redistribution.
Labor Conditions and Materialism:

Improved Labor Conditions: Growth proponents argue that new machinery and
technology generally make labor less taxing and hazardous, improving working
conditions.
Leisure and Reflection: Higher living standards, resulting from growth, have increased
leisure time, providing opportunities for reflection and self-fulfillment.

Environmental Stewardship:

Addressing Environmental Problems: Advocates acknowledge environmental issues

but argue that limiting growth is not the solution.
Market-Based Solutions: Pollution is seen as a "problem of the commons," and
solutions involve regulatory measures, taxes, or market-based incentives to address
environmental misuse.

Sustainability of Growth:

Resource Prices: Proponents argue that if natural resources were being depleted
faster than discovered, their prices would rise. However, resource prices have
generally declined.
Human Knowledge and Imagination: Growth advocates contend that economic
growth is not solely reliant on extractable natural resources but is driven by human
knowledge and imagination, suggesting limitless possibilities