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Title: Economic Growth
Description: Economic growth is important for understanding politics across the globe. These are college level notes but they can also be used for high school classes and AP courses.
Description: Economic growth is important for understanding politics across the globe. These are college level notes but they can also be used for high school classes and AP courses.
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Economic Growth
Saturday, February 27, 2016
1:33 PM
The Remarkable Rise in Living Standards: The Record
• The key to rising living standards is a continuing increase in average labor
productivity
• Real GDP per person provides a measure of the quantity of goods and services
available to the typical resident of a country at a particular time
○ Positively related to life expectancy, infant health, and literacy
• Small differences in growth rates can have large long-run effects because of the
power of growth rates that are compounded over time
• Compound Interest: the payment of interest not only on the original deposit but
on all previously accumulated interest
○ N = P(1+r)^t
○ N = investment
○ P = initial payment
○ R = interest rate
○ T = time
• GDP doubling rate: n = 72/annual growth rate
Why Nations Become Rich: the Crucial Role of Average Labor
Productivity
• Average Labor Productivity: Y/Pop = (Y/N)(N/Pop)
○ Y = total real output (as measured by real GDP)
○ N = the number of employed workers
○ Pop = the total population
• Real GDP per Person: Average labor productivity x Share of population
employed
○ The quantity of goods and services that each person can consume
depends on how much each worker can produce and how many people
(as a fraction of the total population) are working
○ Real GDP can grow only to the extent that there is growth in worker
productivity and/or the fraction of the population that is employed
• As more and more baby-boomers retire, the fraction of the population that is
employed will begin to drop
○ In the long run, the improvement in living standards brought by the rising
share of Americans with jobs will be brief
The Determinants of Average Labor Productivity
productivity and/or the fraction of the population that is employed
• As more and more baby-boomers retire, the fraction of the population that is
employed will begin to drop
○ In the long run, the improvement in living standards brought by the rising
share of Americans with jobs will be brief
The Determinants of Average Labor Productivity
• Human Capital: an amalgam of factors such as education, training, experience,
intelligence, energy, work habits, trustworthiness, and initiative that affects the
value of a worker's marginal productivity
• Physical capital allows workers to produce more efficiently
• Diminishing Returns to Capital: if the amount of labor and other inputs
employed is held constant, then the greater the amount of capital already in
use, the less an additional unit of capital adds to production
○ Increasing the amount of capital available to the workforce will tend to
increase output and average labor productivity
○ The degree to which productivity can be increased by an expanding stock
of capital is limited
• In general, an abundance of natural resources increases the productivity of
workers who use them
○ Countries need not posses large quantities of natural resources within
their own borders to achieve economic growth
• A country's ability to develop and apply new, more productive technologies will
help to determine its productivity
○ Single most important source of productivity improvement
• Entrepreneurs are people who create new economic enterprises
○ A social and economic milieu that allows entrepreneurship to flourish
appears to promote economic growth and rising productivity
• Managers work to satisfy customers, deal with suppliers, organize production,
obtain financing, assign workers to jobs, and motivate them to work hard and
efficiently
• One of the key contributions government can make is to provide a political and
legal environment that encourages people to behave in economically
productive ways
○ Establish well-defined property rights
○ Political instability can be detrimental to economic growth
○ A political system that promotes the free and open exchange of ideas will
speed the development of new technologies and products
Promoting Economic Growth
• Because skilled workers are more productive than unskilled workers,
governments in most countries try to increase the human capital of their
citizens by supporting education and training programs
• Government can encourage high rates of saving and investment in the private
sector
○ IRA legislation is to made to make saving more financially attractive to
• Because skilled workers are more productive than unskilled workers,
governments in most countries try to increase the human capital of their
citizens by supporting education and training programs
• Government can encourage high rates of saving and investment in the private
sector
○ IRA legislation is to made to make saving more financially attractive to
American households (no taxes on fund deposited or on interest earned)
○ Investment tax credit, which reduces the tax bills of firms that invest in
new capital
○ Public investment, or the creation of government-owned capital
• Government supports basic research
• Poorer countries first need to improve the legal and political environment that
underpins their economies
Thinking About the Costs of Economic Growth
• Costs of creating new capital
○ Diverts resources that could otherwise be used to increase the supply of
consumer goods (consume less)
○ In a society that is relatively well-off, people may be more willing to make
sacrifices to achieve higher economic growth in the future
• Cost of research and development to improve technology
• Cost of training
• "Limits of Growth" theory assumes economic growth is more of what we have
now
○ Increases in real GDP could come from new or higher-quality products
○ Increased wealth and productivity expands society's capacity to take
measures to safeguard the environment
○ Ignores the power of the market to deal with scarcity
§ Trigger price changes that induce suppliers and demanders to deal
with the problem
Title: Economic Growth
Description: Economic growth is important for understanding politics across the globe. These are college level notes but they can also be used for high school classes and AP courses.
Description: Economic growth is important for understanding politics across the globe. These are college level notes but they can also be used for high school classes and AP courses.