macsg17 - 17 [32] Long-Run Growth C hapter objectives:...


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439 17 [32] Long-Run Growth C hapter objectives: 1. Define economic growth and identify the sources of economic growth. 2. Explain the information presented by an aggregate production function. Describe the circumstances that cause diminishing returns and relate this concept to the work of Malthus and Ricardo. 3. List the four factors that affect growth. 4. Outline the strategies proposed to increase the growth rate. 5. Summarize the relationship between economic growth and environmental quality. BRAIN TEASER: How can growth occur in a “Robinson Crusoe” type of economy? Does the arrival of Friday represent economic growth? Compare and contrast economic growth in primitive economies with growth in developed economies. OBJECTIVE 1: Define economic growth and identify the sources of economic growth. Economic growth is an increase in real per capita GDP resulting in improved standards of living. This chapter is concerned with what causes the upward trend. Production is limited by the resources and technology that the economy possesses. Growth occurs when more resources become available or when current resources are used more efficiently. In terms of the production possibility frontier, the maximum levels of production shift to the right as the resource base expands and/or technology improves. (page 319 [631]) Growth can take place in two ways: either the economy discovers new resources or it uses its given resources more efficiently. Growth occurs, then, through: (a) An increase in resources (i) Labor supply (ii) Physical capital (iii) Human capital
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440 Study Guide to Principles of Macroeconomics (b) The discovery of new ways to combine resources more efficiently—to increase their productivity (i) Technological change (ii) Other advances in knowledge (iii) Economies of scale. Convergence theory suggests that less developed countries may “catch up” with those that are more developed, essentially, by learning from their mistakes and by adopting successful technologies. ±±± LEARNING TIP: Remember the “Rule of 72.” This rule of thumb lets us estimate how quickly a quantity will double in size, given a growth rate. The growth rates included in Table 17.1 (32.1) may seem fairly similar but, when we apply the “rule of 72” we see that, if the U.S. growth rate of 2.7% is sustained, the American GDP would double in about 27 years while China’s growth rate of 9.6% would make the Chinese economy double in less than 8 years! ² Practice 1. Economic growth is defined as an increase in (a) real output. (b) consumption per household. (c) economic well-being. (d) the rate at which inventions occur. ANSWER: (a) Growth is difficult to measure—the accepted yardstick is real GDP (or real GDP per capita). 2. When we draw a production possibility frontier, we assume that the quantity of (a) capital available increases as we move along the production possibility frontier.
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This note was uploaded on 02/13/2010 for the course ECON 1102 taught by Professor Wissink during the Spring '09 term at Cornell University (Engineering School).

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