Economic Growth

Economic Growth

n Real GDP increases from one year to the next.

Standard of Living Increase

n For standard of living to increase, then per capita Real GDP must increase.

n Per capita Real GDP=Real GDP/Population

Economic Growth Rates:
Selected Countries

Short-Run and Long-Run Growth

n On a PPF diagram:

n Short-run: move from an inefficient point inside the PPF out to an efficient point on the PPF.

n Long-run: push the PPF outward to a previously unattainable point.

Economic Growth

n On AD-AS diagram:

n Short-run: a shift from underperforming economy back to LRAS (full-employment GDP).

n Long-run: a rightward shift of LRAS to a higher Real GDP level.

Short-Run Economic Growth

Long-Run Economic Growth

Causes of Economic Growth I

n increased resources

n expanded capital goods base

n increased or improved technology

n increased productivity

n protection of individual property rights

n economic freedom

Causes of Economic Growth II

n free international trade

n improved infrastructure

n peace and stability

n low (no) political corruption

n more favorable tax situation

Causes of Economic Decline I

n decreased resources

n reduced capital goods base

n decreased or obsolete technology

n decreased productivity

n absence of protection of individual property rights

Causes of Economic Decline II

n loss of economic freedom

n protected international trade

n absent or decaying infrastructure

n war, insurrection, instability

n rampant political corruption

n unfavorable tax situation

Results of economic growth

n More satisfactions of wants and needs

n Raised standard of living

n Reduced poverty rates

n Improved working conditions

n More leisure time

n Greater concern for the environment

n Greater ability to deal with poverty and environmental problems

Results of economic decline

n Fewer satisfactions of wants and needs

n Declining standard of living

n Increased poverty rates

n Poorer working conditions

n Less leisure time

n Less concern for the environment

n Less ability to deal with poverty and environmental problems

Growth Policies

n Short-run:

n Shift AD right using fiscal or monetary policy.

n Long-run:

n Shift LRAS right using supply-side policy.

n Also, AD and SRAS will shift right

Long-Run Growth Policies

n Reduce tax rates on earners, businesses, and investors.

n increase the incentive to be more productive and to earn more.

n increase the profit margin and incentive to expand production

n Reduce oppressive and costly government regulation of business.

Investment Spending and Economic Growth, 1970-1990

Private Sector or Government?

n Industrial policy:

n Government selects the growth sectors and abets them.

n Process will be captured by lobbyists and special-interest groups.

n “Winners” are politically selected.

n Private sector:

n The marketplace selects the growth sectors.

n Some sectors will succeed and some will not, according to the discipline of the market.