1. Economic growth can be defined in two ways: as an increase in real GDP over some time period or as an increase in real GDP per capita over some time period. The latter definition takes into account the size of the population. With either definition economic growth is calculated as a percentage rate of growth per year.
a. economic growth is important because it lessens the burden of scarcity; it provides the means of satisfying economic wants more fully and fulfilling new wants
b. one or two percentage point differences in the rate of growth result in substantial differences in annual increases in the economy’s output. The approximate number of years required to double GDP can be calculated by the rule of 70 which involves dividing 70 by the annual percentage rate of growth
2. Modern economic growth can be described as an improvement in living standards that is continual and sustained over time. The result is a substantial improvement in the standard of living in less than a human lifetime. Such modern economic growth began in England around 1776 with the invention and use of the steam engine, the mass production of goods and expanded trade among nations. Subsequent developments include the use of electric or other sources of power, more technological development, and new products and services. This modern economic growth contributed to the transformation of the culture, society, and politics of nations.
a. There has been an uneven distribution of modern economic growth among nations, and such a distribution accounts for the large differences in per capita GDP among nations. The United States and nations of western Europe experienced modern economic growth many years earlier than did other nations, and as a result have standards of living that are much higher than most other nations.
b. It is mathematically possible for poorer countries with a lower per capita income (follower countries) to catch up with richer nations that have a higher per capita income (leader countries). Leader countries must invent and implement new technology to grow their economies, but such a process means the growth rates in leader nations will be slow. Follower countries can have a faster growth rate because they simply adopt the existing technologies and apply them to the country, thereby sipping the lengthy process of technological development of the leader countries.
3. Institutional structures are important for starting and sustaining modern economic growth because they increase saving and investment, develop new technologies, and promote more efficient allocation of resources. Such institutional structures include strong support for property rights, the use of patents and copyrights, efficient financial institutions, widespread education and literacy, free trade, and a competitive market system. There are other factors that also contribute, such as a stable political system and positive social or cultural attitudes toward work and risk taking.
4. The ingredients of growth depend on supply, demand, and efficiency factors.
a. the supply factor includes the quantity and quality of resources (natural, human, and capital) and technology
b. the demand factor influences the level of aggregate demand in the economy that is important for sustaining full employment of resources
c. the efficiency factor affects the efficient use of resources to obtain maximum production of goods and services (productive efficiency) and to allocate them to their highest and best use by society (allocative efficiency)
5. A familiar economic model can be used for the analysis of economic growth.
a. in the production possibilities model, economic growth shifts the production possibilities curve outward because of improvement in supply factors. Whether the economy operates on the frontier of the curve or inside the curve depends on the demand factor and efficiency factors.
b. discussions of growth, however, focus primarily o supply factors. From this perspective, economic growth is obtained by increasing the labor inputs and by increasing labor productivity. This relationship can be expressed in equation terms: real GDP= worker-hours * labor productivity
(1) The hours of work are determined by the size of the working-age population and the labor-force participation rate (the percentage of the working age population in the labor force)
(2) Labor productivity (real out per work hour) is determined by many factors such as technological advance, the quantity of capital goods, the quality of labor, and the efficiency in the use of inputs
6. Several factors are important in growth accounting
a. the two main factors are increases in quantity of labor (hours of work) and increases in labor productivity. In recent years the most important factor has been increased labor productivity, so it is worthwhile identifying the five factors to help increase labor productivity
b. technological advance is combining given amounts of resources in new and innovative ways that result in a larger output. It involves the use of new managerial methods and business organizations that improve production. Technological advance is also embodied in new capital investment that adds to the productive capacity of the economy.
c. the quantity of capital has expanded with the increase in saving and investment spending in capital goods. This private investment has increased the quality of each worker’s tools, equipment, and machinery. There is also public investment in infrastructure in the United States.
d. Increased investment in human capital (the training and education of workers) has expanded the productivity of workers
e. Economies of scale means that there are reductions in the per-unit cost for firms as output expands. These economies occur as the market for products expands and firms have the opportunity to increase output to meet this great demand.
f. improved allocation of resources occurs when workers are shifted rom lower-productivity employment to higher-productivity employment in an economy. Included in this category would be reduction in discrimination is labor markets and reduced barriers to trade, both of which increase the efficient use of labor resources.
7. There is an ongoing debate about whether economic growth is desirable and sustainable.
a. the antigrowth view sees several problems: growth pollutes the environment; may produce more goods and services, but does not create a better life; and may not be sustainable at the current rate of resource depletion
b. The defense of economic growth is based on several considerations: growth produces a higher standard of living and reduces the burden of scarcity; the technology it creates improves people’s lives and can reduce pollution; and it is sustainable because market incentives encourage the use of substitute resources
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