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Chapter 8:
Economic Growth
Lecture Notes
I.
Introduction
A. Learning objectives After reading this chapter, students should be able to:
1. List two ways that economic growth is measured.
2. Define modern economic growth and explain institutional structures needed for an
economy to experience it.
3. Identify the general supply, demand, and efficiency forces that give rise to economic
growth.
4. Describe growth accounting and the specific factors accounting for economic growth
in the United States.
5. Explain why the trend rate of U.S. productivity growth has increased since the earlier
1973 1995 period.
6. Discuss differing perspectives as to whether growth is desirable and sustainable.
II.
Economic Growth.
A. Two definitions of economics growth are given.
1. The increase in real GDP, which occurs over a period of time.
2. The increase in real GDP per capita, which occurs over time. This definition is superior
if comparison of living standards is desired. For example, Chinas 2012 GDP was
$12,380 billion compared to Denmarks $332 billion, but per capita GDPs were $9100
and $37,700 respectively.
3. Either figure, the GDP or GDP per capita, growth can be negative.
4. Growth in real GDP does not guarantee growth in real GDP per capita. If the growth in
population exceeds the growth in real GDP, real GDP per capita will fall.
B. Growth is an important economic goal because it means more material abundance and ability
to meet the economizing problem. Growth lessens the burden of scarcity.
C. The arithmetic of growth is impressive. Using the rule of 70, a growth rate of 2 percent
annually would take 35 years for GDP to double, but a growth rate of 4 percent annually
would only take about 18 years for GDP to double. (The rule of 70 uses the absolute value
of a rate of change, divides it into 70, and the result is the number of years it takes the
underlying quantity to double.)
D. Main sources of growth are increasing inputs or increasing productivity of existing inputs.
1. About one-third of U.S. growth comes from more inputs.
2. About two-thirds come from increased productivity.
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IV.
Determinants of Growth
A. Four supply factors relate to the ability to grow.
1. The quantity and quality of natural resources,
2. The quantity and quality of human resources,
3. The supply or stock of capital goods, and
4. Technology.
B. Two demand and efficiency factors are also related to growth.
1. Aggregate demand must increase for production to expand.
2. Full employment of resources and both productive and allocative efficiency are
necessary to get the maximum amount of production possible.
VI.
VII.
Accounting for growth (an attempt to quantify factors contributing to economic growth)
A. More labor input is one source of growth. Labor force has grown by 1.6 million workers per
year for the past 56 years and accounts for about one-third of total economic growth.
B. The growth of labor productivity contributed to only about half of the growth from 19731993, but was responsible for all of it from 2001-2007, and is expected to account for about
92% of the growth between 20011 and 2021.
C. Consider This Women, the Labor Force, and Economic Growth
1. The percentage of women working in the paid labor force has risen from 40 percent in
1960 to 60 percent today.
2. Womens productivity has increased with greater investments in human capital.
Productivity increases have raised womens wages and increased the opportunity cost of
staying home.
3. Reduced birthrates, growth in industries typically attracting women workers, urban
migration, increased availability of part-time jobs, and antidiscrimination laws have all
increased labor market access for women.
D. Technological advance, the most important factor in productivity growth, accounts for 40
percent of productivity growth.
E. Increases in quantity of capital are estimated to explain about 30 percent of productivity
growth.
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McGraw-Hill Education.
F. Education and training improve the quality of labor, and account for about 15 percent of
productivity growth. (See Figure 8.4)
G. Improved resource allocation and economies of scale also contribute to growth and explain
about 15% of total productivity growth.
1. Economies of scale occur as the size of markets and firms that serve them have grown.
2. Improved resource allocation has occurred as discrimination disappears and labor moves
where it is most productive, and as tariffs and other trade barriers are lowered.
VIII.
IX.
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2. Growth today has more to do with expansion and application of knowledge and
information, so is limited only by human imagination.
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McGraw-Hill Education.