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sg25 - Chapter 9 ECONOMIC GROWTH Key Concepts Long-Term...

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135 9 ECONOMIC GROWTH* K e y C o n c e p t s Long-Term Growth Trends Over the past 100 years, growth in real GDP per person in the United States has averaged 2 percent per year. The growth rate varies from one period to the next. It slowed between 1973 and 1983 and has since increased. A few rich nations are catching up to the U.S. level of real GDP per person. Many poor nations are not catching up, but Hong Kong, Korea, Singapore, and Taiwan are generally growing more rapidly than the United States and so they are catching up. China also is catching up but from a long way behind. The Causes of Economic Growth: A First Look Three institutions are the basic precondition for eco- nomic growth: Markets — enable buyers and sellers to conduct transactions. They also convey information (in the form of prices) that create incentives for people to change their quantities demanded and supplied. Property rights — social arrangements that govern the ownership, use, and disposal of productive re- sources and goods and services. Monetary exchange — facilitates buying and selling of goods and services. * This is Chapter 25 in Economics . Markets, property rights, and monetary exchange create incentives to specialize. For growth to continue, incen- tives are needed to pursue three crucial activities: Saving and investment in new capital — the accu- mulation of capital adds to the nation’s productiv- ity and level of output. Investment in human capital — human capital, the skills and talents people possess, is a key ingredient for economic growth. Much human capital is ac- quired through education; some is obtained through doing the same task over and over. Discovery of new technologies — technological advancement is crucial to economic growth. Growth Accounting Growth accounting is a tool used to calculate the quantitative contribution to real GDP growth of each of its components, growth in labor and capital and technological change. The aggregate production function shows that the quantity of real GDP supplied is determined by em- ployment, capital, and technology. Labor productivity is real GDP per hour of labor; it equals real GDP divided by aggregate labor hours. Pro- ductivity growth slowed after 1973 and has speeded up after 1983. Growth accounting divides growth in productivity into two components: Growth in capital per hours of labor, and Technological change. C h a p t e r
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1 3 6 C H A P T E R 9 ( 2 5 ) The productivity curve is a relationship that shows how real GDP per hour of labor varies as the amount of capital per hour of labor changes with no change in technology. Figure 9.1 shows two productivity curves. An increase in the amount of capital per hour of labor leads to a movement along a productivity curve, as shown in Figure 9.1 by the movement from point a to point b on PC 0 .
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