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17 C H A P T E R ECONOMIC GROWTH GROWTH ECONOMICS Supply Factors Increases in the Quantity & Quality of Natural Resources Increases in the Quantity & Quality of Human Resources Increases in the Supply (or Stock) of Capital Goods Improvements in Technology GROWTH ECONOMICS Demand Factor

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Economic growth l.jpg

17

C H A P T E R

ECONOMIC

GROWTH


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GROWTH ECONOMICS

Supply Factors

  • Increases in the Quantity & Quality of Natural Resources

  • Increases in the Quantity & Quality of Human Resources

  • Increases in the Supply (or Stock) of Capital Goods

  • Improvements in Technology


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GROWTH ECONOMICS

Demand Factor

  • Households, Businesses, and Government Must Purchase the Economy’s Expanded Output

Efficiency Factor

  • The Economy Must Achieve Economic Efficiency as well as Full Employment


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PRODUCTION POSSIBILITIES ANALYSIS

Economic Growth

C

A

b

Capital Goods

a

0

B

D

Consumer Goods


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Hours

of Work

Labor

Productivity

=

X

Real GDP

PRODUCTION POSSIBILITIES ANALYSIS

Growth and Production Possibilities

Labor and Productivity

Hours of Work

Labor-Force Participation Rate

Labor Productivity


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SUPPLY DETERMINANTS

OF REAL OUTPUT

  • Size of employed labor force

  • Average hours of work

Labor

Inputs

(Hours

of Work)

REAL

GDP

=

X

  • Technological advance

  • Quantity of capital

  • Education and training

  • Allocative efficiency

  • Other

Labor

Productivity

(Average

Output

Per Hour)


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GROWTH IN THE AD-AS MODEL

Production Possibilities and Aggregate Supply

Extended AD-AS Model


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GROWTH IN THE AD-AS MODEL

ASLR1

ASLR2

C

A

Price Level

Capital Goods

Q1

Q2

B

D

Real GDP

Consumer Goods


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ECONOMIC GROWTH IN THE

EXTENDED AD – AS MODEL

ASLR1

ASLR2

AS2

AS1

Price Level

P2

P1

AD2

AD1

o

Q1

Q2

Real GDP


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5

4

3

2

1

0

Real GDP

Real GDP Per Capita

U.S. ECONOMIC GROWTH RATES

U.S. Economic Growth,

Annual Averages for Five Decades

Average Annual Increase (Percent)

1950-1959 1960-1969 1970-1979 1980-1989 1990-1999


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ACCOUNTING FOR GROWTH

  • Growth Accounting

  • Labor Inputs versus Productivity

  • Technological Advance

  • Quantity of Capital

    • Infrastructure

  • Education and Training

    • Human Capital


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ACCOUNTING FOR GROWTH

Accounting for Growth of U.S. Output,

1960-2008

2002 Q3

to 2008 Q4*

1990 Q3

to 2002 Q3

1973 Q4

to 1990 Q3

1960 Q2

to 1973 Q4

4.2

1.6

2.6

Increase in Real GDP

Increase in quantity of labor

Increase in labor productivity

2.9

1.6

1.3

2.9

0.9

2.0

3.2

1.4

1.8

*Rates beyond 2002 are projections

Source: Economic Report of the President, 2003


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100

80

60

40

20

0

High School Graduates or More

College Graduates or More

ACCOUNTING FOR GROWTH

Changes in the Educational Attainment of the U.S. Adult Population

Percent of U.S. Population

1950 1960 1970 1980 1990 2000

Source: U.S. Census Bureau


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ACCOUNTING FOR GROWTH

Economies of Scale

Improved Resource Allocation

Other Factors


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1

Singapore

604

1

Taiwan

569

2

South Korea

587

2

Singapore

568

3

Taiwan

585

3

Hungary

552

4

582

4

Japan

550

Hong Kong(China)

5

Japan

579

5

South Korea

549

6

Belgium

558

6

Netherlands

545

7

Netherlands

540

7

Australia

540

8

Slovak Republic

534

8

Czech Republic

539

9

Hungary

532

9

United Kingdom

538

10

Canada

531

10

Finland

535

19

United States

502

18

United States

515

GLOBAL PERSPECTIVE

Average Test Scores, 8th. Grade, 1999

Mathematics

Rank Score

Science

Rank Score

Source: Third International Math and Science Study


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PRODUCTIVITY ACCELERATION:

A NEW ECONOMY?

  • Reasons for the Productivity Acceleration

    • Microchip and Information Technology

    • New Firms and Increasing Returns

    • Start-Up Firms


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PRODUCTIVITY ACCELERATION:

A NEW ECONOMY?

  • Sources of Increasing Returns

    • More Specialized Inputs

    • Spreading of Development Costs

    • Simultaneous Consumption

    • Network Effects

    • Learning by Doing

  • Global Competition


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PRODUCTIVITY ACCELERATION:

A NEW ECONOMY?

  • Macroeconomic Implications

    • More Rapid Economic Growth

    • Low Natural Rate of Unemployment

    • Growing Tax Revenues

  • Skepticism About the New Economy


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1

2

3

4

5

6

7

8

9

10

GLOBAL PERSPECTIVE

Growth Competitiveness Ranking 2002

Rank

United States

Finland

Taiwan

Singapore

Sweden

Switzerland

Australia

Canada

Norway

Denmark

Source: World Economic Forum


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IS GROWTH DESIRABLE

AND SUSTAINABLE?

The Antigrowth View

In Defense of Economic Growth


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KEY TERMS

growth accounting

infrastructure

human capital

economies of scale

New Economy

information technology

start-up firms

increasing returns

network effects

learning by doing

economic growth

supply factors

demand factor

efficiency factor

labor productivity

labor-force participation rate

BACK

END

Copyright McGraw-Hill/Irwin, Inc. 2005


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Chapter 18 Next...

Deficits,

Surpluses

and the

Public Debt


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