Economic Growth

1
Chapter 17

• Economic Growth
• Samantha Godwin and Sarah Kelly

2
What is Economic Growth?

• The expansion of real output
• For the United States real GDP increased by 450
  percent between 1950-2000, while population
  increased by 80 percent

3
The Supply Factor

• What increases the supply?
• Increases in quality/quantity of natural or human
  resources
• Increases in the supply or stock of capital goods
• Improvements in technology

4
The Demand Factor

• To achieve the higher production potential
  created by supply factors, households,
  businesses, and governments must purchase the
  output of goods and services
• To put it simply what is made must be bought
• Keeps unplanned increases in inventories to a
  minimum and ensures that resources are fully
  employed

5
The Efficiency Factor

• Productive efficiency using resources in the
  least costly way
• Allocative efficiency production of a mix of
  goods and services that maximizes peoples
  well-being

6
Putting it all together

• 1. Unemployment caused by insufficient spending
  (demand) may lower the rate of new capital
  accumulation (supply) and delay expenditures on
  research, i.e. new technological innovations
  (supply).
• 2. Widespread inefficiency in the use of
  resources (efficiency) may translate into higher
  costs of goods and services, which lowers
  profits, which in turn may slow innovation and
  reduce the accumulation of capital (supply)

7
Growth and Production Possibilities

• PPC indicates the various maximum combos of
  products an economy can produce with a fixed
  quality and quantity of natural, human, and
  capital resources and its stock of technolgical
  knowledge
• Recall from Chapter 2 an improvement in any of
  the supply factors will push the PPC outward from
  AB to CD

8
The PPC Coupled with Demand/Efficiency Factors

• Demand Factor an increase in total spending is
  needed to move the economy fro point a on AB to a
  point on CD
• Efficiency Factor the least cost production and
  optimal location (i.e. marginal benefit marginal
  cost) is needed on CD for the resources to reach
  their full potential

9
Continued...

• Some points
• Normally increases in total spending match
  increases in production capacity
• Competitive market economy tends to drive the
  economy towards productive and allocative
  efficiency

10
Labor and productivity

• Society can increase output and income by
• Increasing the inputs of resources
• Raising the productivity of those inputs
• Real GDP hours of work (size of employed labor
  force or labor force participation rate,
  average hours of work)
• X
• labor productivity (tech advance,
  quantity of capital, education and
  training, allocative efficiency)

11

• Ziam Economy Year 1
• Number of Workers 10
• Hours per year 2000
• Total input 20,000 (2000 X 10)
• Productivity 10 dollars ? real GDP 200,000
  dollars (20,000 X 10)
• Ziam Year 2
• Work hours 20,200
• Productivity 10.40 dollars
• Real GDP 210, 080 dollars
• Rate of Economic Growth
• (210,080- 200,000)/(200,000) 5 percent

12
Accounting for Growth

• Growth Accounting
• The bookkeeping of supply-side elements that
  contribute to changes in Real GDP
• Used by the Council of Economic Advisors
• 2 main categories increases in hours of work and
  increases in labor productivity
• Improvements in labor productivity accounted for
  about 2/3 of the increases in US real GDP between
  1990 and 2002 the use of more labor accounted
  for the rest

13
Technological advancements

• 40 percent of growth
• Innovative production techniques
• New managerial methods
• New forms of business organization
• Closely related to capital formation
  technological innovation promotes investment

14
Quantity of Capital

• 30 percent of growth
• Complementary to labor more money makes labor
  more productive (i.e. the purchase of new
  equipment)
• Key determinant of productivity the amount of
  capital goods available per worker if all are
  better equipped there is more productivity
• Public capital (infrastructure) complements
  private capital (i.e. investment in highways
  promote investment in retail stores along their
  routes)

15
Education

• Lots of education is good

16
Economies of Scale and Resource Allocation

• Economies of Sale Reductions in per-unit cost
  that result from increases in the size of markets
  and firms
• Improved Resource Allocation workers over time
  have moved from low-productivity to high
  productivity employment (e.g. agriculture to
  manufacturing)

17
Productivity Acceleration

• Over long periods, labor productivity growth
  determines an economys growth of real wages and
  its standard of living
• Many economists believe the US has achieved a New
  Economy of faster productivity growth and higher
  rates of economic growth
• Productivity acceleration is based on
• 1. rapid technological change in the form of the
  microchip and information technology
• 2. increasing returns and lower per-unit costs
• 3. heightened global competition holds down
  prices

18
Continued

• Faster productivity means a higher economic
  speed limit, meaning
• It grows more rapidly without inflation
• Economy has a lower natural rate of unemployment
• Generates more rapid increases in tax revenues

19
Antigrowth View

• Schools of thought
• Tree huggers or leaf people more growth equals
  more pollution
• Socially conscious growth is not equally
  distributed growth causes an increase in poverty
• Tree huggers posing as pessimists growth is not
  sustainable because it kills the earth

20
Pro-Growth

• More growth equals higher living standards and
  greater material abundance
• Growth improves infrastructure, enhances the care
  for the sick, elderly, and poor
• The way to improve the economic position of the
  poor is to increase household incomes through
  higher productivity and economic growth
• Technological innovations improve working
  conditions
• Pollution is a problem of the commons the
  environment is treated as common property with
  no or insufficient restrictions in its use
• Growth has allowed economies to reduce pollution
• If natural resources were depleting faster than
  their discovery, there would be a rise in prices

21
Chapter 18

• Deficits, surpluses, and the Public Debt

22
Some definitions

• Budget deficit the excess of government
  expenditures over receipts
• Surplus an excess of government revenues over
  expenditures
• Public debt the total accumulation of the
  governments deficits (minus surpluses) over
  time treasury bills, notes, bonds, and US
  savings bonds grows because of wars, revenues
  declines during recessions, and lack of fiscal
  discipline by elected leaders

23
Budget Philosophies

• Annually balanced budget- promotes swings in the
  business cycle rather than counters them
• Cyclically balanced budget- upswings and
  downswings must be of roughly comparable
  magnitude
• Functional finance- the primary purpose of the
  federal finance is to stabilize the economy
  problems associated with consequent deficits or
  surpluses are of secondary importance

24
Some facts

• 2002- public debt 6.2 trillion, or 21, 476 per
  person
• The public holds 57 percent, while the federal
  reserve and federal agencies hold 43
• 1980s and 1990s- the public debt increased
  sharply, but has slowly declined

25
Concerns about Debt

• Clarifications
• The debt needs only to be refinanced not refunded
• Federal government has the power to increase
  taxes to make interest payments on debt
• The public debt is not a vehicle for shifting
  economic burdens to future generations Americans
  inherit not only the public debt (liability) but
  also the US securities (asset) the finance the
  debt

26
Continued

• Problems
• - payment of interest on the debt may increase
  income inequality
• - interest payments on the debt require higher
  taxes, which may impair incentives
• - paying interest or principle on the portion of
  the debt held by foreigners means a transfer of
  real output to abroad
• - government borrowing to refinance or pay
  interest on the debt may increase interest rates
  and crowd out private investment spending,
  leaving future generations with a smaller stock
  of capital than they would have otherwise

27
Governmental Action and Current events

• Large deficits in 1980s and 90s caused congress
  to increase tax rates and limit government
  spending in 1993
• The large actual and projected budget surpluses
  of the early 2000s set off a debate about whether
  or not to (a) pay down the public debt, (b)
  reduce tax rates or eliminate some taxes, and (c
  ) increase government spending
• In 2001, the Bush Administration and Congress
  chose to reduce marginal tax rates and phase out
  the federal estate tax