10/22/20141 gdp and economic growth chapter 05. 10/22/20142 outline gross domestic product gross...

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GDP and Economic GDP and Economic GrowthGrowth

Chapter 05Chapter 05

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OutlineOutline

Gross Domestic ProductGross Domestic ProductEconomic GrowthEconomic Growth

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Economic GrowthEconomic Growth

General InformationGeneral Information Ingredients of GrowthIngredients of GrowthProduction Possibilities AnalysisProduction Possibilities AnalysisAccounting for GrowthAccounting for GrowthThe Recent Productivity AccelerationThe Recent Productivity Acceleration Is Growth Desirable and Sustainable?Is Growth Desirable and Sustainable?

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An increase in real GDP over time or An increase in real GDP over time or an increase in real GDP per capita an increase in real GDP per capita over timeover time

GDP per capita = GDP / Population = GDP per capita = GDP / Population = Output per personOutput per person

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Growth as a goalGrowth as a goal– Growth lessens the burden of scarcity.Growth lessens the burden of scarcity.– A growing economy can consume more A growing economy can consume more

today and yet can produce/consume today and yet can produce/consume more in the future.more in the future.

– Indications: rising real wages and Indications: rising real wages and incomes, higher living standards, less incomes, higher living standards, less poverty, better environment.poverty, better environment.

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Arithmetic of growthArithmetic of growth– (Annual) growth rate(Annual) growth rate

y (%) = %y (%) = %Y = [(YY = [(Y22 – Y – Y11) / Y) / Y11 ] * 100 ] * 100

– Rule of 70 (if y < 3%)Rule of 70 (if y < 3%)

Approx. # years to double Y = 70 / (y * Approx. # years to double Y = 70 / (y * 100)100)

– Rule of 72 (if y > 3%)Rule of 72 (if y > 3%)

Approx. # years to double Y = 72 / (y * Approx. # years to double Y = 72 / (y * 100)100)

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Economic GrowthEconomic GrowthAn example – An example – 3 hypothetical countries in 20083 hypothetical countries in 2008 Y = $6 trillion; Population = 200 million; Y = $6 trillion; Population = 200 million;

Real GDP per capita = $30,000Real GDP per capita = $30,000

YearSlogo Sumgo Speedo

2008 2% 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 ($)

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Economic GrowthEconomic GrowthAn example – An example – The U.S.The U.S. Y = $12 trillionY = $12 trillion

YearU.S. U.S. U.S.

2008 2% 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)

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Economic GrowthEconomic GrowthGrowth in the U.S.Growth in the U.S.

Nominal GDP

Real GDPGDP

DeflatorPopulation

Nominal GDP per

capita

Real GDP per

capita

(billions of current dollars)

(billions of 2005

dollars)

(index 2005=100)

(in thousands)

(current dollars)

(2005 dollars)

1950 $293.70 $2,006.00 14.6 151,684 $1,936 $13,2251960 $526.40 $2,830.90 18.6 180,760 $2,912 $15,6611970 $1,038.30 $4,269.90 24.3 205,089 $5,063 $20,8201980 $2,788.10 $5,839.00 47.8 227,726 $12,243 $25,6401990 $5,800.50 $8,033.90 72.2 250,181 $23,185 $32,1122000 $9,951.50 $11,226.00 88.7 282,413 $35,237 $39,7502005 $12,638.40 $12,638.40 100.0 296,000 $42,697 $42,6972008 $14,441.40 $13,312.20 108.5 304,530 $47,422 $43,714

I 2009 $14,151.20 $12,901.50 109.7 307,596 $46,006 $41,943

Year

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Ingredients of GrowthIngredients of Growth– Supply factorsSupply factors– Demand factorsDemand factors– Efficiency factorsEfficiency factors

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Ingredients of GrowthIngredients of Growth– Supply factorsSupply factors

Increases in quantity and quality of natural Increases in quantity and quality of natural resourcesresources

Increases in quantity and quality of human Increases in quantity and quality of human resourcesresources

Increases in the supply (or stock) of capital Increases in the supply (or stock) of capital goodsgoods

Improvement in technologyImprovement in technology

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Ingredients of GrowthIngredients of Growth– Demand factor - Households, Demand factor - Households,

businesses, and governments must businesses, and governments must purchase the expanding output of G&S.purchase the expanding output of G&S.

– Efficiency factor - The economy must Efficiency factor - The economy must achieveachieve Productive efficiency (least-cost production)Productive efficiency (least-cost production) Allocative efficiency (optimal mix to Allocative efficiency (optimal mix to

maximize people’s well-being)maximize people’s well-being) Full employmentFull employment

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Production Possibilities AnalysisProduction Possibilities Analysis– Growth and production possibilitiesGrowth and production possibilities– Inputs and productivityInputs and productivity

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Growth and production Growth and production possibilitiespossibilities

Consumer goods

PPC

ac

C a

p i t a l

g o

o d s

PPC’

b

Supply factors shift the PPC out to PPC’.

Demand and efficiencyfactors move the economyfrom a to b (optimal points).Economic growth is realized.

Economic growth is not realized at point c.

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Real GDP = Real GDP =

input of labor (hours of input of labor (hours of work)work)

xx

labor productivity (real labor productivity (real output output per hour of work) per hour of work)

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Real GDP=

Laborinputs

(hours ofwork)

Laborproductivity

(averageoutput

per hour)

Size of employedlabor force

Average hours of workper week

Technological advance

Quantity of capital

Education and training

Allocative efficiency

Others

X

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Accounting for GrowthAccounting for Growth– Increases in hours of work (labor inputs)Increases in hours of work (labor inputs)

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Accounting for GrowthAccounting for Growth– Increases in labor productivityIncreases in labor productivity

Technological advanceTechnological advance Quantity of capital, e.g. infrastructureQuantity of capital, e.g. infrastructure Education and training (human capital)Education and training (human capital)

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Accounting for GrowthAccounting for Growth

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Economies of scale and resource allocationEconomies of scale and resource allocation Institutional structures that promote growthInstitutional structures that promote growth Other factors Other factors

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Economies of scale and resource allocationEconomies of scale and resource allocation– Reduction in per-unit production cost that results Reduction in per-unit production cost that results

from increases in the size of markets and firmsfrom increases in the size of markets and firms– Over time workers move from low-productivity Over time workers move from low-productivity

employment, e.g. agriculture, to high-productivity employment, e.g. agriculture, to high-productivity employment, e.g. manufacturing or serviceemployment, e.g. manufacturing or service

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Accounting for GrowthAccounting for Growth– Institutional structures that promote Institutional structures that promote

growthgrowth Strong property rightsStrong property rights Patents and copyrightsPatents and copyrights Efficient financial institutionsEfficient financial institutions Free tradeFree trade A competitive market systemA competitive market system

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Accounting for GrowthAccounting for Growth– Other factors -- Social-cultural-political Other factors -- Social-cultural-political

environmentenvironment Economic freedomEconomic freedom Political freedomPolitical freedom

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U.S. Labor Productivity U.S. Labor Productivity Since Mid-90sSince Mid-90s

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The Recent Productivity AccelerationThe Recent Productivity Acceleration– Statistics:Statistics:

1973-1995: 1.4% per year1973-1995: 1.4% per year 1995-2007: 2.7% per year1995-2007: 2.7% per year 2006: 1%2006: 1% 2007: 1.9%2007: 1.9%

– Reasons:Reasons: The microchip and information technologyThe microchip and information technology New firms and increasing returnsNew firms and increasing returns Global competitionGlobal competition

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The Recent Productivity AccelerationThe Recent Productivity Acceleration– Implication: more rapid economic Implication: more rapid economic

growthgrowth– Skepticism about permanenceSkepticism about permanence

A “wait-and-see” attitudeA “wait-and-see” attitude

– What can we conclude?What can we conclude? Prospects for a lasting increase in Prospects for a lasting increase in

productivity are good.productivity are good. Time will tell.Time will tell.

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Is Growth Desirable and Sustainable?Is Growth Desirable and Sustainable?– The antigrowth viewThe antigrowth view

Problems: pollution, global warming, ozone Problems: pollution, global warming, ozone depletion, other environmental problemsdepletion, other environmental problems

Social problems, e.g. poverty, Social problems, e.g. poverty, homelessness, discrimination, etc. persist.homelessness, discrimination, etc. persist.

We do not have a “good life,” e.g. more We do not have a “good life,” e.g. more stress, burnouts, etc.stress, burnouts, etc.

Growth may not be sustainable, due to Growth may not be sustainable, due to resource depletionresource depletion

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The Is Growth Desirable and The Is Growth Desirable and Sustainable?Sustainable?– In defense of economic growthIn defense of economic growth

Greater material abundanceGreater material abundance Higher living standardsHigher living standards Environment not debasedEnvironment not debased No indication that resources are running outNo indication that resources are running out Human imagination is keyHuman imagination is key

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Economic Growth in ChinaEconomic Growth in China

Annual average growth rates (past 25 Annual average growth rates (past 25 years)years)– 9% (real GDP)9% (real GDP)– 8% (real GDP per capita)8% (real GDP per capita)

Sources of this growthSources of this growth– More productive laborMore productive labor– More international tradeMore international trade– Transition to a market economyTransition to a market economy– Member of WTO (2001)Member of WTO (2001)

ChallengesChallenges– Weak financial systemWeak financial system– Income inequality across geographic areasIncome inequality across geographic areas

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10/22/20141 gdp and economic growth chapter 05. 10/22/20142 outline gross domestic product gross...

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