Economic Growth

1
Lecture 4

• Economic Growth
• Trade and Specialization
• An Introduction to Markets.

2
Economic Growth

• Economic growth is illustrated by an economies
  expansion in production over time.

3
Economic Growth

• The Cost of Economic Growth
• The development of new goods and better ways of
  producing goods and services is technological
  change.
• The growth of capital resources is capital
  accumulation.
• Does economic growth allow us to avoid
  opportunity costs?

4
Economic Growth
c
10
8
Tape-making machines (per month)
b
6
4
2
PPF0
a
1
2
3
4 5 6 7 Tapes
(millions per month)
5
Economic Growth
c
10
If we allocate no resources to machines, we
can make 5 million tapes a month (a).
8
Tape-making machines (per month)
b
6
4
2
PPF0
a
4 5 6 7 Tapes
(millions per month)
1
2
3
6
Economic Growth
c
10
However, if we produce 6 machines a month (b),
then the PPF rotates. We will be able to
produce more tapes in the future.
8
Tape-making machines (per month)
b
6
4
2
PPF0
a
1
2
3
4 5 6 7 Tapes
(millions per month)
7
Economic Growth
c
10
However, if we produce 6 machines a month (b),
then the PPF rotates. We will be able to
produce more tapes in the future.
8
Tape-making machines (per month)
b
b'
6
4
2
PPF0
PPF1
a
a'
1
2
3
4 5 6 7 Tapes
(millions per month)
8
Economic Growth
c
Regardless, we still incur an opportunity cost.
We had to decrease the number of tapes produced
from 5 to 3 million in order to produce more
machines..
10
8
Tape-making machines (per month)
b
b'
6
4
2
PPF0
PPF1
a
a'
1
2
3
4 5 6 7 Tapes
(millions per month)
9
Economic Growth in the United States and Hong
Kong

• Since 1960, Hong Kong has grown more rapidly than
  the United States
• Hong Kong has devoted a bigger fraction of its
  resources to accumulating capital.

10
Economic Growth in theUnited States and Hong Kong
United States in 1960
Capital goods (per person)
Hong Kong in 1960
a
a
Consumption goods (per person)
11
Economic Growth in theUnited States and Hong Kong
United States and Hong Kong in 1997
United States in 1960
Capital goods (per person)
b
Hong Kong in 1960
c
a
a
Consumption goods (per person)
12
Choices for HS Graduate
current consumption can influence future choices
ED
college grad choices
hs choices
consumption
13
Gains from Trade

• Comparative Advantage
• A person or nation has a comparative advantage in
  an activity if they/it can perform an activity at
  a lower opportunity cost than others.
• Why is there a difference?
• Differences in abilities
• Differences in resource characteristics

14
Comparative Advantage

• Toms Factory
• Can produce 4,000 lengths of tape/hour or
• Can produce 1,333 cases/hour
• Opportunity Cost
• To produce 1 case, he must decrease tape
  production by 3 lengths opportunity cost.
• To produce 1 length of tape, he must decrease
  case production by 0.333 case opportunity cost.

15
Comparative Advantage
5
4
Cases (thousands per hour)
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
3
2
Toms PPF
1
1 2 3 4
Tape (thousands of lengths per hour)
16
Comparative Advantage

• Nancys Factory
• Can produce 1,333 lengths of tape/hour or
• Can produce 4,000 cases/hour
• Opportunity Cost
• To produce 1 case, she must decrease tape
  production by 0.333 lengths opportunity cost.
• To produce 1 length of tape, she must decrease
  case production by 3 cases opportunity cost.

17
Comparative Advantage
5
4
Cases (thousands per hour)
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
3
2
Nancys PPF
Nancys PPF
1
1 2 3 4
Tape (thousands of lengths per hour)
18
Comparative Advantage
5
4
Cases (thousands per hour)
3
2
Nancys PPF
Nancys PPF
1
1
Toms PPF
1 2 3 4
Tape (thousands of lengths per hour)
19
Comparative Advantage
5
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
b'
4
4
Cases (thousands per hour)
3
c
2
Nancys PPF
Nancys PPF
Trade line
a
1
1
Toms PPF
b
1 2 3 4
Tape (thousands of lengths per hour)
20
Comparative Advantage
5
Nancys opportunity cost 1 tape costs 3 cases,
and 1 case costs 1/3 tape
Toms opportunity cost 1 tape costs 1/3 case,
and 1 case costs 3 tapes
b'
4
4
Cases (thousands per hour)
3
c
2
Nancys PPF
Nancys PPF
Trade line
a
1
1
Toms PPF
b
1 2 3 4
Tape (thousands of lengths per hour)
21
Absolute Advantage

• An absolute advantage exists when a person or
  nation can produce more of a good than another.
• Individuals and nations can have absolute
  advantages in any or all goods.
• However, it is not possible to have a comparative
  advantage in everything.

22
The Market Economy

• Two key social institutions organize trade among
  nations.
• Property rights
• Real
• Financial
• Intellectual

23
The Market Economy

• Two key social institutions organize trade among
  nations.
• Markets
• A market is any arrangement that enables buyers
  and sellers to get information and to do business
  with each other.

24
Circular Flows in the Market Economy
25
The Market Economy

• Coordinating Decisions
• Markets coordinate individual decisions through
  price adjustments.

26
Role of Economics in Action

• You must work with EIA to reinforce your
  understanding of trade and specialization
• The exam will reflect the tutorial and review
  questions in chapter 3 of EIA