Chapter Overview
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Fundamental Questions 1. What is economic growth? 2. How are economic growth rates determined? 3. What is productivity? 4. Why has U.S. productivity changed? Teaching Objectives The primary purpose of this chapter is to introduce the principles of economic growth. The chapter outlines the factors that underlie the long-term growth of the macroeconomy. The unique features of this chapter include two definitions of economic growth-the percent change in real GDP and the percent change in per capita real GDP; a presentation of the determinants of economic growth (labor, capital, natural resources, and technological improvements); and the defining and linking of total factor productivity to economic growth. The determinants of productivity are explored within the context of the U.S. productivity slowdown. Deteriorating labor quality, as measured by declining test scores, changing attitudes toward work, and a slowdown in technological innovation, is cited as a factor contributing to the slowdown. An area that requires special attention is the material on the determinants of economic growth. This will be used in the next chapter as development strategies are discussed. The material on the U.S. productivity slowdown is usually a topic that can easily stimulate class discussion. Key Term Review economic growth
Lecture Outline and Teaching Strategies 1. Defining Economic Growth Economists compare growth of economies by measuring the growth of real GDP and per capita real GDP. 1.a. Real GDP 1.a.1. Compound growth: Small percentage differences yield large results over time because of compounding. Teaching Strategy: Draw your class's attention to Figure 1 in the text. It is useful for showing the impact of compounding. 1.a.2. The rule of 72: 72 divided by the growth rate in real GDP yields the number of years required for output to double. 1.b. Per capita real GDP 1.c. The problems with definitions of growth Teaching Strategy: It is very important to explain that the distribution of per capita income, not just the growth of per capita income, matters. 2. The Determinants of Growth Teaching Strategy: Point out that when resources increase or technology improves, the long-run aggregate supply curve shifts to the right. At every price level costs are lower and profits are greater; thus, firms will increase production. 2.a. Labor: An increase in the labor force will shift the long-run aggregate supply curve to the right. 2.b. Capital 2.c. Land 2.d. Technology: Technological improvements increase the efficiency of a given capital stock and labor force. 3. Productivity Total factor productivity is the ratio of an economy's output to its capital and labor. Teaching Strategy: Reflect with your students on some of the technological improvements that have radically increased productivity. Some examples are pesticides and fertilizers used in food production, robotics in automobile production and in other industries, and computers in the office. 3.a. Productivity and economic growth: Growth in output is the sum of the growth of total factor productivity and the growth in resources. Productivity growth accounts for the difference in growth rates among countries. 3.b. The U.S. productivity slowdown Teaching Strategy: Point out that a slowdown in productivity can occur without being immediately apparent. This is because the causes of a productivity slowdown occur gradually and slowly. 3.b.1. Labor quality: Lower-quality education as reflected in declining SAT scores, demographic shifts, and changing attitudes toward work explains part of the U.S. productivity slowdown. 3.b.2. Technological innovation: The slowdown in real expenditures on research and development in the late 1960s and early 1970s may also account for some of the slowdown in U.S. productivity growth. 3.b.3. Other factors: The U.S. productivity slowdown may also be the result of higher energy costs and the shift from manufacturing to services. 3.c. Growth and development: Economic growth depends on the growth of productivity and resources. |
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