Economic Growth


Economic growth is defined as either:
  • an increase in real GDP
  • an increase in real GDP per capita

Ingredients of Growth

In order for an economy to grow there are three factors that must increase:
  • Supply Factors
    • Increases in the natural and quality of natural resources
    • Increases in the quantity and quality of human resources
    • increases in the supply (or stock) of capital goods.
    • Improvements in technology. An example of an improvement in technology that led to economic growth would be the cotton gin.
    • Supply factors -- changes in the physical and technical agents of production -- enable an economy to expand its potential GDP.
  • Demand Factor
    • Demand factor: To achieve the higher production potential created by the supply factors, households, business, and government must purchase the economy's expanding output of goods and services.
      • No unplanned increases in inventories and resources will remain fully employed.
  • Efficiency Factor
    • To reach its production potential, an economy must achieve economic efficiency as well as full employment.
      • productive efficiency: to use the resources in the least costly way
    • allocative efficiency: specific mix of goods and services that maximizes people's well-being.
All three factors are related and effect each other.

In realistic economies, there are tradeoffs between these two goals, whereas achieving one at the expense of another may occur. Governments then must plan according to the economy's needs.

Growth and Production Possibilites

  • Increases in total spending match increases in production capacity and the economy moves from a point on the previous possibility curve to a point on the expanded curve.
  • A competitive market is good because it lead the economy toward productive and allocative efficiency
  • All growth shifts the production possibilites graph to the right
  • A producion possibility curve indicates the maximum combinations of products and economy can produce with its fixed quntity of natural, human, and capital resources and its stock of technological knowledge.
    • A curving PPC assumes increasing opportunity costs, while a downward sloping line acting as a PPC assumes constant opportunity costs. (The latter, however, is not realistic.)
  • An improvement in any of the supply factors will puch the production possibilites cutve outward.
  • But the demand factor reminds us that an increase in total spening is needed to move the economy a point to a point on the curve.
  • And the effciciency factor reminds us that we need least-cost procustion and an optimal location on the curve for the resources to make their maximum possible dollar contribution to total output.

Labor and Productivity

  • Society can increased its real output and incomein two fundamental ways
    • Increase the inputs of resources
    • Raise the productivity of those inputs
  • Labor productivity is measure of real output per hour of work
  • rGDP= hours of work x labor productivity

Aspects Contributing to Productivity

  • Improvements in technology
    • It is important to consider the amount of capital, such as machines, available for each worker. If a businesses increases the quantity of labor, but at the same time increases the number of workers proportionally, there will not be an increase in capital available for each worker.
    • In the U.S. many types of infrastructure are not considered under gross private domestic investment, instead they are types of public capital. Businesses have a a reliance on this public infrastructure, such as roads and streets in order to transport there goods. Gross domestic private domestic investment within businesses is expected to rise if the their is an increase in the public capital. [1]
  • The knowledge of the workers, if workers have poor knowledge about what they're doing, they will be less productive

Hours of Work

  • The hours of labor input depend on:
    • The size of the employed labor force
    • The length of the average workweek, which is 40 hours in the U.S.
  • Labor-force participation rate: the percentage of the working-age population actually in the labor force. (McConnell and Brue pg.310)
  • Human Capital- the knowlegde and skills that make a productive worker.
  • the length of the average workweek is governed by legal and institutional considerations and by collective bargaining (McConnell and Brue)

Technological advance

  • technological advances and investment are related since new technology promotes more investment in new machinery and equiptment. (McConnel and Brue 314)
  • Most recently, technological advance has exploded, particularly in the areas of information technology such as wireless communications and the internet (McConnell and Brue)
  • estimated to account for about 40% of productivity growth (McConnell and Brue 313).
  • The main stimulant of technological growth is new knowledge, because this producers to increase output by new and improved combinations of resources (McConnell and Brue 313-314).

Education and Training

  • Human capital investment requires formal education and on-the-job training
  • Over the past several decades education has been more accesable to people
    • However the quality of education has somewhat declined and as a nation we do not do as well as other nations

Quantity of Capital

  • explains 30% of productivity growth.
  • More and better plant and equipment make workers more productive (McConnell and Brue)
  • key determinint is amount of capital goods per worker.
  • public investment in infastructure has grown which has increased out investment.

Production Possibilties and Aggregte Supply
  • The supply factors that shift the economys prouction possibilties curve outward also shift its long-run aggreagte supply curve rightward. ( McConnell and Brue 310)
  • Te long run AS curves are vertical because an economys potiential output,-its full-employment - is determined by the supply and effiecency factor. ( McConnell and Brue 310)
  • The economy's potiential output is always the same no matter what the price level is.

Economies of Scale

  • Economies of scale result when production costs drop as a result of the size of a market and the businesses within that market becoming larger.
  • Real GDP increases through economies of scale, because of the increase in the real output.
  • A larger business is able to employ more sophisticated and expensive capital, as compared to a smaller business. The use of such capital can increase labor productivity. [2]
  • A business can disperse certain input cost as it becomes larger and increase its outputs.
    • Consider that a video game costs $1,000,000 to produce and $10 to distribute and sell (*these distribution costs may involve the process of putting the video game on a disc and also shipping to retail stores). If only 2,000 copies of the game are produced and sold, the cost for each copy of the game will be considered as ($1,000,000 (base cost)+$20,000 (cost for distributing 2,000 copies)/2,000 (total copies produced))= $510 per copy. However, if the business were to increase its output significantly and distribute and sell 200,000 copies of the game, the cost for each copy of the game would drop to ($1,000,000+ $2,000,000/200,000)= $15 per copy. [3]

The Productivity Accerleration: A New Economy?
  • New Economy: one with higher projected trend rate of productivity growth and reater potential economic growth than in 1973-1995 (McConnell and Brue 317)
    • Over extended periods of time, the economy's labor productivity determines its average real hourly wage (McConnell 317).
    • Economy's income per hour = output per hour (McConnell 317).
    • Growth in productivity in the New Economy is the main factor in increasing its standard of living (McConnell 317).

Reasons for the Productivity Accerleration
  • microchip and information technology
    • led the way for other inventions, such as automobiles, air travel, and televisions
    • information technology boomed with the development of the Internet and personal computers and laptops
  • New Firms and Increasing Returns
    • Start up Firms: Firms that are designed to search for new ideas from which to develop entire industries off of. Many firms fail but some succeed in a very big way by becoming leaders in their respective industries. (McConnel & Brue 317)
    • Increasing Returns: This often occurs with Start up firms and is defined as "when a firm's output increases by a larger percentage than the increase in its inputs" (McConnel & Brue 317. In other words, if a company gets unexpected profits, they will tend to flourish and expand.
    • Alternatively, increasing returns abound when the rate of increase in the output of a business is greater than the rate of increase in its inputs (McConnell and Brue 317).[4]
    • New firms often improve with time as they "learn by doing" and as they gain experience, they become more and more efficient, and a better business overall.
    • More specialized inputs are the case for firms when they are growing as a business.
      • Example: A computer Company as its growing can hire specialized people for the computer programming or computer engineering required for the job.
    • There is also a spreading of development costs as firms can spend more money for developing a product since they are making my money.


Is Growth Desirable and Sustainable?


The Antigrowth View
  • People may argue that too much growth may lead to excess of pollution, ozone depletion, and other threats to the environment (McConnell and Brue, 320).
  • Due to the Earth having a limited amount of resources, slow economic growth is preferable as faster growth is harder to maintain (McConnell and Brue, 321).
    • People who support antigrowth believe that "poverty is a problem of distribution, not production," and therefore that solutions to problems like poverty, homelessness, and discrimination may not be attributable to economic growth (McConnell and Brue 320-321).Therefore, critics of growth argue that there is not that much evidence to show that economic growth has solved sociological problems like poverty, homelessness, and discrimination.
    • While growth may facilitate higher incomes and production, it does not necessarily bring higher standards of living since we would be producing more but enjoying our fruits less. Growth leads to high-paced jobs, workers burning out, and alienated employees who do not have good personal lives.

In Defense of Economic Growth
  • By allowing growth, people have higher incomes. As a result, people can afford more education, more medical care, or can travel more (McConnell and Brue, 321).
  • Economic growth is one way to reduce poverty because in order to increase the incomes of the poor, there has to be greater productivity and therefore economic growth. (McConnell and Brue 321).
  • Limiting growth is the wrong solution to environmental problems since economic growth has actually done measures to reduce pollution, clean up the environment, and set aside land for preservation purposes (McConnell and Brue 321).
  • Growth also leads to better infrastructure, which facilitates travel and businesses.
  • Economic growth has not made labor more stressful, as critics have accused. New, more advanced technology usually makes jobs easier, not harder.

  1. ^ McConnell, Campbell R., and Stanley L. Brue. Economics: Principles, Problems, and Policies. Sixteenth ed. New York: McGraw-Hill, 2005. Print.
  2. ^ McConnell, Campbell R., and Stanley L. Brue. Economics: Principles, Problems, and Policies. Sixteenth ed. New York: McGraw-Hill, 2005. Print.
  3. ^ McConnell, Campbell R., and Stanley L. Brue. Economics: Principles, Problems, and Policies. Sixteenth ed. New York: McGraw-Hill, 2005. Print.
  4. ^ >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> McConnell, Campbell R., and Stanley L. Brue. Economics: Principles, Problems, and Policies. Sixteenth ed. New York: McGraw-Hill, 2005. Print.