Economic Growth can be defined by:

o An increase in real GDP occurring over some time period.

o For measuring expansion of military potential or political preeminence
o An increase in real GDP per capita occurring over some time period.
o For comparing living standards

Real GDP per capita:

o -The amount of real output per person in a country.

Growth as a Goal:
o Growth is a widely held economic goal.
o It lessens the burden of scarcity.

Arithmetic of Growth:
o Small changes in the rate of economic growth…REALLY MATTER.
o Rule of 70: quantitative grasp of the effect of economic growth.

o The rule of 70 is generally applicable. Works or estimating how long it will take the price
level or a savings account to double at various percentage rates of inflation and interest.

Growth in USA
-Real GDP grows at an annual rate of 3.2%.
-Real GDP per capita grows at an annual rate of 3%
-Improves products and services
-2 important key points about USA growth rates.
o It is not constant or smooth over time.
o Many countries share the USA experience of positive and ongoing economic growth.
Modern Economic Growth
-Definition: sustained and ongoing increases in living standards that can cause dramatic increase in
the standard of living within less than a single human lifetime.
-It vastly affected: Cultural, Social, and Political arrangements

Uneven Distribution of Growth

-The different starting dates or modern economic growth in various parts of the world are the main
cause of the vast differences in per capita GDP levels seen today.
-Huge gap of living standards caused different countries started modern economic growth at different
times.

Catching Up Is Possible
-Leader Countries:
o Real GDP per capita grows by an average annual rate of just 2-3% because inventing and
implementing new tech. is slow and costly.
o Growth rates are limited by the rate at which new technologies can be invented and applied.
-Follower Countries (poor):
o Grow much faster because they can adopt existing tech. from leader countries.
o 3.7-5.7% growth per year.
o They skip past many stages of tech. and development that the leader countries had to go
through.

The USA is doing so well because:

o A much larger fraction of the USA population is employed than in other rich countries.
o USA employees work many more hours/year.
o Legal work week is longer.
Growth promoting institutional structures:
o Strong property rights
o Patents and copyrights
o Efficient financial institutions
o Literacy and widespread education
o Free trade
o Competitive market system

Determinants of Growth
Supply Factors: Changes in the physical and technical agents of production, enable an economy to
expand potential GDP.
o ↑ in quantity and quality of natural resources.
o ↑ in quantity and quality of human resources.
o ↑ in supply of capital goods
o Improvements in tech.
 Demand Factors:
o Gov. MUST purchase economy’s expanding output of goods and services to have a higher
production potential.
Efficiency Factor:
o To reach its full production potential, an economy must achieve economic efficiency as
well as full employment.

Growth Accounting
o Definition: System that assess importance of the supply-side elements that contribute to
changes in real GDP.
 2 Main Categories:
1. ↑in hours of work
2. ↑in labor productivity
a. Can be attributed to tech. progress, ↑quantity of capital/worker,
improvements in education and training of workers, exploitation of
economies of scale, and improvements in the allocation of labor across
different industries.
Reasons why trend rate of USA productivity growth has increased since the earlier 1973-1995:
o Rapid tech. change in the form of the microchip and info tech.
o ↑ returns and lower per unit costs
o Heightened global competition that holds down prices.

Is growth desirable and sustainable?

o -Critics of rapid growth say that it adds to environmental degration, increases human stess,
and exhausts the earth’s finite supply of natural resources.
o -Defenders of rapid growth say that it’s the primary path to the rising living standards nearly
universally desired by ppl, and there are no indications that we’re running out resources.