Chapter 16 Economic Growth

Economic Growth does what for living standards

raises it

most economics is aimed at understanding the ______.
over, the long run, most economies _________.
rate for what each economy grows at is______ between each country.

1. business cycle
2. most economies grow wealthier. Long run for most countries is positive.
3. is very different

what are the two measures the economist use to compare economic growth?

1. real gdp
2. per capital real GDP

Economic Growth

an increase in real gdp (output)
as more goods and services are produced, the real gdp increases and people are able to consume more.

how to calculate the % change in real gdp over a year

% of change in real GDP= (change over year/beginning value(beginning # for year) X100

real gdp of Singapore 2012 = 57,450 million
Singapore dollar 2013= 58,191 million
what is the rate that the economy grew at?

(58,191- 57,450) / 57,450 X100

small changes in rates of growth produce _____changes in real gdp over period of years


Compound Growth
Industrial countries= 2.5% growth of real gdp
developing countries= 6.5% growth of real gdp

this growth rate might not seem substantial, but it is. The small percent is magnified over time.
after 40 years this difference in output becomes a huge difference= the level of output is 6X larger at the higher growth rate
2.5%= $12.41 billion
6.5%= $2.

what are countries so concerned with maintaining positive high rates in growth

because of compound growth

Rule of 72

the number of years required for an amount to double in value is 72 divided by the annual rate of growth
need to divide 72 by the growth rate, we find the approximate time that it takes for any value to double

deposit $100 in bank
annual interest is 6%
at this rate of interest, the rule of 72 tells us that account will have $200 after _____ years

to double 100 x 2
72/6 = 12 years

what is the problem with just using real gdp growth

one of the most important parts of gdp growth is raising the standard of living.
real gdp can be misleading. a country could show positive growth in real gdp but if the population is growing at an even higher rate, output per a person can actually fall.

Per Capita real GDP

Real GDP divided by the population
(how economist adjust the growth rate for changes in population)

population growth rate are higher in developing countries than they are industrial, so real gdp must grow at a _____rate

much higher rate. If it wants to maintain a similar growth rate in per capital real GDP.

The problem with definition of growth

-economic growth does not tell us whether the average citizen is better off.
-there measures say nothing about how the income is distributed. (poor might be staying more and the rich getting richer)
-neither say anything about the quality of life. people

The determinants of Growth pg 356


Long run Aggregate supply curve is ______ line.

vertical. because in the long run real gdp does not change...
however if an increase in output. There is a shift right of the vertical long run aggregate supple line.
the higher the rate of growth the farther the line shifts to the right

graph 357

as the economy grows, the long run aggregate supply curve shifts to the right. This represents an increase in the potential level of real gdp.

To find the determinants of economic growth_____
what are three determinants of Aggregate supply

-must look at determinants of aggregate supply.
3 determinants=
-resource price (productive resources-labor, land, capital)
-expectations (not a basis for long term growth in sense of continuous rightward movement)

Labor force

-economic growth depends on the size and quality of labor force
Labor force= 16+ age + % of population that is in the labor force
-grows more in developing countries because higher birth rates
-changes in productivity can compensate for lower growth in th

US labor force has changed considerably in recent decades
post WW2 baby boom

in 1960s (us population was made up of 1/3 children ). 1950s, 41% population was under 24
altered the age structure of the population
Problems with this:
-us labor force grew 2.5%, 2xs the growth rate at 1950s. 1980s-1990s growth rate slowed a ton as baby

more important than the size of the labor force is=

its productivity


-labor is combined with capital to produce goods and services
-even if labor force is growing it needs: machines, tools, factories, to make economic growth.
-capital is a critical resource in a growing economy


-Land=surface, water, forest, minerals, other natural resources
-abundant natural resources can be contributed to economic growth.
-Japan has very few natural resources but it has still had great economic growth


*** ways of combining resources to produce output. A key determinant to produce goods and services
-technological advances allow more output from a given resource.
-education gives industrial countries a huge advantage over developing countries in new inn

one way to asses contributions that a resource makes to output is its


productivity is the ratio of

is the ratio of the output produced to the amount of input
we can either measure the productivity of a single resource (capital, labor, etc) or all of the resources combined

Total Factor productivity (tfp)

the ratio of the economy's output to its stock of labor and capital
this is the term that economist use to describe the overall productivity of an economy. It is the ratio of the economy's output to its stock of labor and capital.

Economic Growth=

Economic Growth= growth rate of TFP + growth rate of resources
if the quantity of resources is growing and each resource is more productive, then output grows even faster than the quantity of resources. Economic growth, is the sum of growth rate of total

What is productivity?

-is the ratio of output produced to the amount of input

Total factor of Productivity?

-is overall productivity of an economy

What are two factors of economic growth?

-recourses and technological advances
(advances in technology allow resources to be more productive)
(if quantity of resources is growing and each resource is more productive, then output grows even faster than quantity of resources)

% change in real gdp=

% change in real gdp= % change in total factor productivity + ( %change size of labor force) + (% change capital stock)
(what this equation shows is the economic growth depends on changes in productivity as well as changes in resources. Even if labor and

How do we accommodate for difference in growth rate across countries?

-all countries experience growth rate in labor force. But capital stock growth is greater in industrial nations than developing nations (who have greater increase in labor force). Those difference are related to productivity

What are several factors that determine productivity in growth? (what explains productivity changes)

-technological innovations
-changes in quality of labor force
-energy prices
-shift from manufacturing to service industries

Labor Quality (determinant of productivity)

-measured by output per hour of labor
-changes in labor quality can stem from technological advances and capital stock however it mainly stems from education, demographics changes, and changing attitudes towards work.

1. education
2. Demographic changes

1.Education Level-education has gone up over time=indicates that the level of education supports increase in US productivity (363)
2. Demographic Change-changes in the size and composition of population have an impact on the labor market. Things that have

Technological Innovation (determinant of productivity)

-Can be difficult to measure however spending on research and development is linked to new technological advances. Though there is a lag time between funding and operation.
-The most notable technological innovation in recent decades has been widespread a

Energy prices (determinant of productivity)

Higher energy prices (ex oil)- this is because energy is an important input across industries.
As price of energy increases, aggregate supply decreases. Energy prices can also effect capital stock-higher energy=energy inefficient capital goods become obso

Manufacturing versus services (determinant of productivity)

In recent decades industrial economies have seen a shift away from manufacturing toward services. Movement into services reduces the overall growth of the economy.

Financial Market Development (determinant of productivity)

-economic growth is related to growth in the financial market. The more developed a countries financial market is the more efficient should be allocation of resources and therefore he greater productivity.

How do financial markets allocate their resources:

-financial institutions act as intermediaries between saves and borrowers
-financial institutions monitor borrowers
-financial institutions provide loans to many people so that if one fails the banks does
-there are lots of types of financing.

Economic growth depends on_______.

productivity and resources
productivity grows unevenly and its rate of growth reflects economic growth.