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Ch 08 - Chapter 8 Economic Growth I The Basics of Economic...

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C h a p t e r   8   E c o n o m i c   G r o w t h I. The Basics of Economic Growth A. Calculating Growth Rates 1. The economic growth rate is the annual percentage change of real GDP. 2. Real GDP per person is real GDP divided by the population. The standard of living depends on real GDP per person. a) The growth rate of real GDP per person approximately equals the real GDP growth rate minus the population growth rate. B. The Magic of Sustained Growth 1. The Rule of 70  states that the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable. II. Long-Term Growth Trends A. Growth in the U.S. Economy 1. From 1905 to 2005, growth in real GDP per person in the United States averaged 2 percent per year. Figure 8.1 (on the next page) illustrates these hundred years of economic growth. 2. Real GDP per person fell precipitously during the Great Depression and rose rapidly during World War II. B. Real GDP Growth in the World Economy 1. Some developed nations have grown more rapidly than the United States. Until the 1990s, Figure 8.3 (a) shows that Japan grew fastest of the rich economies. 2. Many less-developed countries in Africa, Central America, and South America stagnated during the 1980s, and have grown slowly since. As Figure 8.3 (b) shows, they have fallen farther behind the United States. 3. Other formerly less-developed nations — Hong Kong, Korea, Singapore, China and Taiwan are examples —have grown very rapidly and have caught up or are catching up with the United States. Many other Asian nations have faster growth than the United States. III. The Sources of Economic Growth The factors that influence economic growth can be divided into those that increase aggregate hours and those that increase labor productivity. A. Aggregate Hours 1. Aggregate hours are the total number of hours worked. Three factors change aggregate hours: a) Working-age population growth b) Changes in the employment-to-population ratio c) Changes in average hours per worker 169
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1 7 0 2. Of these three factors, the only one with persistent changes I working-age population growth. So growth in aggregate hours is the result of population growth. B. Labor Productivity 1. Labor productivity is the quantity of real GDP produced by an hour of labor. It is calculated by dividing real GDP by aggregate hours. Three factors influence the growth of labor productivity: a) Physical capital growth : Growth in physical capital depends on people’s saving and firms’ investment. b) Human capital growth : Human capital, the accumulated skill and knowledge of human beings, is a source of both increased labor productivity and technological advances. c) Technological advances : Technological change has made the largest contribution toward increasing labor productivity. Usually technological advances are embedded in new capital equipment.
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