Economic Growth

Economic growth can occur in two ways

1. An increase in real GDP

2. An increase in real GDP per capita

Growth is an important goal because it means more material abundance and ability to meet the economizing problem

Causes of Growth

There are 4 supply factors that allow an economy to grow:

1. the quantity and quality of natural resources

2. the quantity and quality of human resources

3. the supply or stock of capital goods

4. technology

Demand factors - aggregate demand must increase for production to expand

Efficiency factors - full employment of resources and both productive and allocative efficiency are necessary to get the maximum amount of production possible

Stability in government

Economies of scale - industries that have lower average total costs with increasing total output

Economic growth can be illustrated with a production possibilities curve in this way:  

An increase in aggregate demand is necessary to sustain full employment at each new level of production possible (full employment level is denoted by points a and b).

Supply Side

On the supply side, firms can do 2 things to increase total output

1. increase number of inputs

The hours of labor input depend on the size of the employed labor force and the length of the average workweek.

2. increasing productivity of inputs

labor productivity is measured as real output per worker per hour)

Productivity can be increased by the following factors

• technological advance

• increased quantity of capital

• increased education and training

• increased allocative efficiency

Total output = worker-hours   x   labor productivity

Therefore, an increase in either amount of input and productivity will increase total output

Economic Growth can also be represented with the aggregate supply - aggregate demand model

Recent decades have shown that price level is rising, which indicates that aggregate demand is increasing more rapidly than long-run aggregate supply.

Detriments to Economic Growth

1. Low savings rates

Low savings rates imply that the opportunity to hold money as an asset is high.  This implies interest rates are high, which causes investment to be low, which further causes aggregate demand to be low.

2. Environmental regulation

Environmental regulations the government imposes deters short-run growth because the money required to comply to regulations is a cost.

3. Little investment

4. Deteriorating infrastructure

Productivity Slowdown

Since the 1970s, the U.S. has been experiencing a productivity slowdown.  This slowdown is significant for thee reasons:

1. it prevents increase in standard of living

2. it may cause inflation if wages rise faster than productivity

3. could cause a decline in US competitiveness in world markets

Causes for this productivity slowdown are:

1. labor quality has experienced slower improvements

• less worker experience

• workers are not as educated

2. slow technological progress as a result of less spending on research and development

3. decreased investment

4. rising energy prices

5. industrial relations and worker management are characterized by an adversarial relationship as opposed to a cooperative one.  

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