3) modern economic theory points to three sources of economic growth. what are these three sources

Macroeconomic Goal: Economic Growth

Introduction

• Read this news commodity to go an idea of the types of problems we will hash out in this affiliate: http://money.cnn.com/2009/10/29/news/economic system/gross domestic product/index.htm
• Macroeconomic Goals
  • 1. Full Employment
  • 2. Low Inflation
  • iii. Economic Growth

Review: What do we already know about Economic Growth?

Economic Growth from the 5Es lesson:

Economic Growth is one of the "5 Es" of economic science or one of the five ways for a society to reduce scarcity.

We defined Economic Growth as an increase in the Ability to produce goods and services and we noted that this not the way the term is normally divers.

This type of Economic Growth is caused past:

a) more than resources
b) better resources
c) better engineering science

If we only had more than resources nosotros could produce more appurtenances and services and satisfy more than of our wants. This will reduce scarcity and give usa more satisfaction (more than adept and services). All societies therefore try to achieve economical growth.

In the AS-Advertisement chapter nosotros redefined this blazon of growth as "increasing the potential" level of output.

Economic Growth from Product Possibilities lesson

We used the production possibilities model to demonstrate how economic growth can reduce scarcity.

We can increase our ABILITY to produce goods and services (or increase our POTENTIAL GDP) if we get:

1. more than resource
2. improve resources, and
3. improve engineering science

Since this increment maximum output that we are able to produce information technology shifts the production possibilities curve outward. On the graph below, economical growth would cause the production possibilities curve to move from PP1 to PP2.

If we accept more than resource we are able to produce more than and therefore the maximum amount that tin be produced (i.e. the product possibilities curve) increases.

This doesn't necessarily hateful that the economy IS producing more, only that it Tin can produce more. To achieve our new potential levels of output we also need full employment and productive efficiency. Information technology could be possible to have this type of economic growth then that we CAN produce the quantities represented by bespeak E, just if in that location is unemployment and productive inefficiency we would exist at a indicate below this new curve (maybe point C). So nosotros may get new resources or new applied science so nosotros Tin produce more than (point Eastward on PP2), only if we don't use the new resources (i.due east. we have unemployment) or if we don't apply the new technology (i.east. we take productive inefficiency) , we may remain on PP1 (point C).

Economic Growth from the Every bit - AD Lesson:

In the affiliate on Every bit-AD nosotros introduced 3 unlike definitions of economic growth:

1. INCREASING OUR POTENTIAL OUTPUT
2. Increasing Output (ACHIEVING OUR POTENTIAL), and
3. Increasing Existent GDP per capita

(one) INCREASING OUR POTENTIAL OUTPUT

This is increasing our Power to produce. This is the definition we used in the 5 Es lesson. This is the well-nigh fundamental definition of economic growth. It is the type of economic growth used on our five Es diagram.

We can increase our ABILITY to produce appurtenances and services (or increase our POTENTIAL Gross domestic product) if we get:

1. more resources
2. improve resources, and
3. better technology

Since this increases maximum output that we are able to produce information technology shifts the PPF outward. On the graph beneath, economic growth would cause the PPF to move from PP1 to PP2.

This doesn't necessarily mean that the economy IS producing more than, simply that information technology CAN produce more than. To attain our new potential levels of output nosotros also demand full employment and productive efficiency. It could exist possible to have this type of economic growth so that we Can produce the quantities represented by indicate E, merely if in that location is unemployment and productive inefficiency we would be at a point below this new curve (maybe bespeak C). So we may get new resources or new technology and so we Tin produce more (bespeak E on PP2), but if we don't use the new resource (i.eastward. we accept unemployment) or if we don't use the new technology (i.eastward. nosotros have productive inefficiency) , we may remain on PP1 (point C).

In the As-Advertizing model INCREASING OUR POTENTIAL OUTPUT is represented past in increase in AS.

Observe that when As increases, the full employment level of output increment from RDO-FE1 to RDO-FE2. This is an increment in our potential level of output.

In the 5 Es lecture we said that economic growth is caused by:

1. more resources
2. better resources, or
3. better technology

An increase in the production possibilities curve is acquired past having more resources, better resource, or better engineering science.

An increase in Every bit is acquired past:

1. a decrease in the toll of resource
2. an increase in productivity
3. lower business taxes and government red tape

These are all really the aforementioned thing.

(2) Increasing Output (or ACHIEVING OUR POTENTIAL)

The most commonly used definition of economic growth is simply increasing output or producing more. (Subsequently we will call this INCREASING REAL GDP.) This is the blazon of economic growth most often mentioned in news reports similar http://money.cnn.com/2009/x/29/news/economy/gdp/index.htm

When an economic system increases its output it is often said to have achieved economic growth. But if by producing more nosotros are only ACHIEVING OUR POTENTIAL, and so we could too say that it is REDUCING UNEMPLOYMENT or ACHIEVING PRODUCTIVE EFFICIENCY. On our graph this would be represented past moving from bespeak D to a point on the curve (A, B, or C).

On our Advert-AS model we could illustrate this type of growth (producing more) past an increase in AD.

Find that output increase from RDO-EQUIL to RDO', but the full employment level of output, which is our potential level of output, does not change (RDO-Fe).

If AD increases enough so that the new equilibrium is at the full employment level of output, it is analogous to going from a point inside the production possibilities curve to a bespeak on the curve.

(3) Increasing Real Gross domestic product per capita

A third definition of economic growth is an increase in real Gross domestic product per capita, or per person. We'll talk over this later.

Economic Growth: Three Definitions - REVIEW

ane. Increasing our ABILITY to Produce (INCREASING OUR POTENTIAL)

a. "economic growth" on the 5Es chart
b. shifting out to a new production possibilities curve
c. ­As
d. causes:

(i) change in input prices (more than resources)
(two) changes in the productivity of resource (better res., meliorate tech.)
(3). legal-institutional environment

2. Increasing output or increasing Real Gross domestic product (ACHIEVING OUR POTENTIAL)

a. achieving "total employment" and "productive efficiency" (5Es)
b. going from a point inside the PPC to a indicate closer to the PPC
c. ­AD
d. increasing GDP per capita
e. causes:

(1) producing at a minimum cost to accomplish productive efficiency

(a) non using more than resource than necessary
(b) using resource where they are best suited
(c) Using the appropriate engineering science

(ii) more spending to ­ AD and accomplish total employment

(a) ­C
(b) ­ I
(c) ­ G
(d) ­ Xn

three. ­ GDP per capita: ­ real GDP at a faster rate than the increase in the population

---

Affiliate 8 - Economic Growth

I am going to do things differently in this online lecture. Below is a detailed outline of the textbook. You can utilise it to guide your reading an for taking notes from the reading. I volition add my own notes.

I. Introduction

A. Learning objectives - Subsequently completing this chapter the educatee should be able to:

1. Ascertain ii measures of economic growth.
2. Explain why growth is a desirable goal.
3. Sympathise the institutional structure an economic system needs if information technology is to experience "modern economical growth" and ongoing increases in standards of living.
4. Identify two principal sources of growth.
5. Explain and use the "rule of 70."
6. Give boilerplate long-term growth rates for U.Due south. and qualifications of raw information.
7. Testify economic growth using production possibilities analysis and aggregate demand aggregate supply analysis.
8. Describe the growth record of the U.S. economy since 1950, including two measures of its long term growth rates.
9. Identify half-dozen major factors that contributed to U.Due south. economic growth according to empirical studies.
10. List three chief reasons for productivity acceleration in the United States since 1995.
11. Listing 5 reasons for increasing returns during the period of productivity dispatch.
12. Evaluate the potential for the productivity acceleration to be a permanent phenomenon.
13. Identify and explain the arguments for and against economical growth.
14. Ascertain and identify terms and concepts at the end of the chapter.

Two. Economical Growth.

A. 2 definitions of economic science growth are given.

1. The increase in real Gross domestic product, which occurs over a period of fourth dimension. Here the writer does non make a distinction betwixt and increase in the potential GDP and achieving the potential GDP. Both of these could cause an "increase in real GDP.

2. The increase in existent Gross domestic product per capita, which occurs over time. This definition is superior if comparing of living standards is desired. For example, China'due south 2003 Gdp was $1410 billion compared to Denmark's $212 billion, but per capita Gdp's were $1110 and $33,750 respectively.

• Growth in existent GDP does not guarantee growth in real GDP per capita. If the growth in population exceeds the growth in real GDP, real GDP per capita volition fall.

B. Growth is an of import economic goal considering it means more material affluence and power to run across the economizing problem. Growth lessens the brunt of scarcity. That is why we report it.

C. The arithmetic of growth is impressive. Using the "rule of 70," a growth rate of two percent annually would take 35 years for Gross domestic product to double, simply a growth rate of 4 percent annually would simply take about 18 years for Gdp to double. (The "rule of seventy" uses the absolute value of a rate of alter, divides it into 70, and the effect is the number of years it takes the underlying quantity to double.)

• Note:
  • small changes in the annual per centum growth of GDP results in large changes in GDP over fourth dimension
  • know the "dominion of 70"

    

D. Main sources of growth are increasing inputs or increasing productivity of existing inputs.

1. Almost one-third of U.S. growth comes from more inputs.

2. Near two-thirds comes from increased productivity.

• Annotation:
  • we said economic growth is cause past:
    • more resources
    • better resources = greater productivity
    • meliorate applied science = greater productivity
  • here the authors are discussing an INCREASE in POTENTIAL GDP

E. Growth Record of the Usa (Tabular array eight.one) is impressive.

Table 8.1

i. Real Gross domestic product has increased over sixfold since 1950, and real per capita GDP has risen over threefold. (Meet columns ii and 4, Table 8.1)

2. Rate of growth record shows that existent Gdp has grown about 3.four percent per twelvemonth since 1950 and real GDP per capita has grown most ii.1 percent per yr. But the arithmetic needs to be qualified.

3. Modern Economic Growth

A. Mod economic growth is characterized by sustained ongoing increases in living standards that can cause dramatic increases in the standard of living within a generation.

B. Economical historians informally date the first of the Industrial Revolution to the yr 1776, when Scottish inventor James Watt perfected a powerful and efficient steam engine.

Note:

• at that place was footling to no growth in living standards from the first of time to well-nigh 200 years ago
• during this period of little or no growth all areas of the world had like standards of living
• therefore the type of economic growth that we run into now is a recent phenomenon in the history of the world
• too, the great differences in living standards is a contempo phenomenon in the history of the globe
• How does "modern economic growth" differ from what came before it?

C. The Uneven Distribution of Growth

1. Modern economic growth has spread only slowly from its British birthplace. It first advanced to France, Germany, and other parts of Western Europe in the early 1800's earlier spreading to the Untied States, Canada, and Commonwealth of australia by the mid 1800's.

2. The different starting dates for modern economic growth in diverse parts of the world are the main crusade of the vast differences in per capita Gross domestic product levels seen today.

3. Effigy 8.i shows what economists have called the groovy departure in income levels around the earth is a result of unlike rates of, and starting dates for, modern economic growth.

• What is the "great deviation"?
• According to the textbook, what is the primary crusade for the "vast differences in in per capita income levels seen today?

D. Catching Up is Possible

one. Countries that began modernistic economical growth more recently are not doomed to be permanently poorer than the countries that began modernistic economical growth at an before date.

2. The poorer 'follower countries' tin grow much faster because they can simply adopt existing technologies from rich 'leader countries'.

3. Table eight.2 shows both

• how the growth rates of leader countries are constrained by the rate of technological progress
• is well is how certain follower countries have been able to catch up by adopting more than advanced technologies and growing apace.

  Table eight.ii

  

• which countries are the "leader countries" and which are the "follower countries"?
• notice that the average growth rates for the these follower countries is higher than for the leader countries
• discover that with these growth charge per unit differences some follower countries have surpassed some leader countries in existent Gdp per capita
• According to the authors, why is the existent GDP per capita of the United States in 2004 so much higher than that of other rich countries?

4. CONSIDER THIS … Economic Growth Rates Matter

"Even small differences in growth rates matter!"

4. Institutional Structures That Promote Growth

A. Table 8.two demonstrates that poorer follower countries can take hold of up. Simply how does a country start that procedure?

B. Economic historians have identified several institutional features that promote and sustain modern economic growth.

1. Strong Property Rights

two. Patents and copyrights (see the CONSIDER THIS … Patents and Innovation)

b. Compounding makes seemingly small differences in growth rates quite significant.

c. Over a 70-yr period, a 4 pct growth rate will generate twice is much output is a 3 percent growth rate, and almost four times is much income is a ii per centum growth rate.

3. Efficient financial institutions

iv. Literacy and widespread education

5. Complimentary trade

half-dozen. A competitive market arrangement

Note the role of Structural Adjustment that we studied in unit one:

• stiff property rights - privatization
• free merchandise
• a competitive market organisation

The textbook lists some other "difficult-to-measure" factors that aid economic growth:

• stable political system
• internal society (no civil wars)
• strong sense of the correct of property ownership
• strong legal status accorded to businesses
• strong laws to enforce contracts
• "no social or moral taboos on production and textile progress"
• belief that wealth creation is a desirable goal
• positive attitude toward work

• I would add that the more equal condition afforded to women in the leader countries has aided economic growth

V. Ingredients of Growth

A. Four supply factors relate to the power to abound. [Shift the production possibilities outward from AB to DC in Figure 8.ii below]

1. The quantity and quality of natural resources,

2. The quantity and quality of human resources,

3. The supply or stock of capital letter goods, and

iv. Technology.

B. 2 demand and efficiency factors are likewise related to growth. [Later on the supply factors shift the production possibilities the need and productive efficiency factors move the economy from a to c or b on the production possibilities graph in Figure 8.2 below.]

1. Aggregate demand must increment for product to expand.

2. Full employment of resources and both productive and allocative efficiency are necessary to become the maximum amount of production possible.

VI. Production Possibilities Analysis (Figure eight.2)

Figure 8.2

A. Growth can exist illustrated with a production possibilities curve (Figure 8.2), where growth is indicated is an outward shift of the curve from AB to CD.

1. Aggregate demand must increase to sustain full employment at each new level of product possible.

2. Additional resources that shift the curve outward must be employed fully and efficiently (productive efficiency) to make the maximum possible contribution to domestic output.

three. For the economy to achieve the maximum increase in value, the optimal combination of goods must exist achieved (allocative efficiency).

Note: it may be useful to reread the 5Es lecture so that you are sure to know the difference between productive efficiency and allocative efficiency. [http://world wide web.harpercollege.edu/mhealy/eco212i/lectures/ch1-18.htm]

VII. Accounting for growth is an attempt to quantify factors contributing to economic growth.

A. More labor input is i source of growth. Labor force has grown by ane.vii meg workers per year for the by 52 years and accounts for about one-3rd of total economic growth.

B. The growth of labor productivity contributed only nearly one-half of the growth from 1973-1993, but was responsible for all information technology from 1995-2004, and is expected to account for well-nigh three-fourths of the growth between 2005 and 2011.

Tabular array 8.3

Average annual percentage changes in the growth of real Gross domestic product in the Us and how much was the upshot of an increase in the quantity of labor and how much was the result of an increase in the productivity of labor

C. According to Table 8.3 between half and iii quarters of economical growth in the US during the past 50 -threescore year is tin can be explained by an increment in the productivity of labor (output per worker), BUT WHAT CAUSED THE INCREASE IN PRODUCTIVITY?

Four causes of an increase in the productivity of labor:

i. Technological advance, the nigh important factor in productivity growth, accounts for 40 percent of productivity growth.

2. Increases in quantity of capital are estimated to explain almost xxx per centum of productivity growth.

three. Didactics and training ameliorate the quality of labor, and account for about 15 percent of productivity growth. (Come across Figure 8.four below)

• President Obama's policy seem to stress the importance of higher level instruction (especially community colleges) in our nation's economical growth
  http://www.usatoday.com/news/pedagogy/2009-07-14-obama-community-colleges_N.htm

4. Improved resource allocation and economies of calibration as well contribute to growth and explain about 15% of total productivity growth.

a. Economies of scale occur is the size of markets and firms that serve them have grown.

b. Improved resource allocation has occurred is bigotry disappears and labor moves where information technology is near productive, and is tariffs and other trade barriers are lowered.

Figure viii.4 - Changes in the educational attainment of the U.S. developed population

Notation:

• the quantity of labor does NOT impact the productivity of labor
• more workers would mean more production
• merely more workers does not necessarily mean more than productivity (more Improve workers would increase productivity)
• Know the difference between:
  • product - the quantity that is produced (the production of cars increased last month)
  • productive efficiency - producing at the minimum cost (one of the 5Es)
  • productivity - how much is produced per unit of resources (output per worker per hour)
• the quantity of labor affects economic growth and the productivity of labor affects economic growth, but just considering we have more workers doesn't mean that nosotros have better workers

D. CONSIDER THIS … Women, the Labor Force, and Economic Growth

1. The percentage of women working in the paid labor force has risen from 40 pct in 1965 to 56 percent in 2006.

ii. Women'southward productivity has increased with greater investments in man capital letter. Productivity increases accept raised women'south wages and increased the opportunity price of staying home.

3. Reduced birthrates, growth in industries typically attracting women workers, urban migration, increased availability of function-time jobs, and antidiscrimination laws accept all increased labor marketplace access for women.

4. in the US during the recession of 2009 the number of women working SURPASSED the number of men for the starting time time
http://world wide web.nytimes.com/2009/02/06/business/worldbusiness/06iht-06women.19978672.html

• How practise the restrictions placed on the function of women in some countries affect their rate of economic growth and their living standards?

Viii. The Recent Productivity Acceleration

A. Improvement in standard of living is linked to labor productivity - output per worker per hr

B. The U.S. is experiencing a resurgence of productivity growth based on innovations in computers and communications, coupled with global capitalism. Since 1995 productivity growth has averaged 2.9% annually - up from 1.4% over 1973-95 period. The "Rule of 70" projects real income will double in 24 years rather than fifty years. (Figure 8.5).

Annotation: over again the authors bespeak out the important role of structural adjustment when they say "coupled with global commercialism"

Figure 8.5 Growth of labor productivity in the Us, 1973-2007

C. Much of the contempo improvement in productivity is due to "new economy" factors such is:

Reasons for the Productivity Acceleration since the mid-1990s:

i. Microchips and information technology are the basis for improved productivity. Many new inventions are based on microchip engineering science.

two. New firms and increasing returns characterize the new economic system.

a. Some of today'due south most successful firms didn't exist 25 years agone: Dell, Compaq, Microsoft, Oracle, Cisco Systems, America Online, Yahoo and Amazon.com are but a few of many.

b. Economies of scale and increasing returns in new firms encourage rapid growth.

Economies of scale mean that is business get larger their average costs of product (cost per unit produced) decreases. (The long run aver total price bend [from microeconomics] is downwardly sloping

This means that they can produce each unit of measurement of output with fewer resources

Graph showing economies of calibration over a broad rage of output

3. Sources of increasing returns and economies of scale include:

a. More specialized inputs.

b. Ability to spread development costs over large output quantities since marginal costs are low.

c. Simultaneous consumption past many customers at the same fourth dimension.

d. Network effects brand widespread use of information goods more than valuable is more use the products.

e. Learning increases with practice.

• What is "simultaneous consumption?
• What are "network furnishings"?
• Note that simultaneous consumption and network effects are relatively recent phenomena

4. Global competition encourages innovation and efficiency.

• some other contempo phenomenon

D. Fifty-fifty if average growth rates in productivity and real output growth remain higher over fourth dimension, business organisation wheel fluctuations (i.eastward. recessions) tin yet occur. (similar 2009)

E. Skepticism about long-term continued growth remains, and only fourth dimension will tell.

Nine. Is Growth Desirable and Sustainable?

A. An antigrowth view exists. (Growth is bad)

1. Growth causes pollution, global warming, ozone depletion, and other problems.

2. "More" is not e'er improve if it means dead-terminate jobs, burnout, and alienation from 1's job.

3. High growth creates high stress.

B. Others argue in defense of growth. (Growth is good)

1. Growth leads to an improved standard of living.

ii. Growth helps to reduce poverty in poor countries.

3. Growth has improved working conditions.

iv. Growth allows more leisure and less alienation from work.

5. Ecology concerns are of import, just growth actually has allowed more sensitivity to environmental concerns and the power to bargain with them.

C. Is growth sustainable? Aye, say proponents of growth.

one. Resource prices are not rising.

2. Growth today has more to do with expansion and awarding of cognition and information, then is limited simply past human imagination.\]

Note: what almost global climate modify?

10. Terminal Discussion: Economic Growth in China

A. Cathay has been experiencing a period of remarkable economic growth.

1. Cathay's real output has grown over the past 25 years at a rate of nigh nine pct per year, quadrupling real output over that menstruum.

2. Rising income has led to more saving, greater capital letter investment, and more direct strange investment, which has helped fuel growth.

iii. Per capita income has increased at an annual rate of viii percent since 1980, despite China's population expanding past 14 million people per yr.

iv. Increased utilize of capital, better engineering science, labor reallocation from agronomics, and increased privatization accept all contributed to greater productivity.

5. Red china'southward growth has been supported by a dramatic increase in exports ($5 billion in 1978 to $1.2 trillion in 2007).

B. Despite its success, China faces a number of of import issues:

one. Inflation rates have been high at times (xv to 25 percent per yr) because of besides much spending relative to capacity. Central cyberbanking reform has helped keep inflation low in contempo years.

two. State endemic enterprises and banks operate unprofitably, probable necessitating a government bailout.

3. Prc has a poor record of protecting intellectual property rights, and keeps its currency artificially undervalued. These problems have caused tension with the United States and threaten to disrupt merchandise if they are not resolved.

4. China'south growth and development has been uneven, significant that at that place are many that have not benefited from the nation's ascension incomes.

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Source: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch8-18.htm

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