CHAPTER 16
(MACRO CHAPTER 16)
Economic Growth
FUNDAMENTAL QUESTIONS
1. What is economic growth?
OVERVIEW AND 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 percentage change
in real GDP and the percentage change in per capita real GDP, a presentation of the determinants of
After reading and reviewing this chapter, the student should be able to:
1. Define economic growth.
2. Use the rule of 72 to determine the number of years required for an amount to double.
KEY TERM REVIEW
economic growth
rule of 72
Chapter 16: Economic Growth 113
total factor productivity (TFP)
LECTURE OUTLINE AND TEACHING STRATEGIES
I. Defining Economic Growth
Economists compare growth of economies by measuring the growth of real GDP and per capita
real GDP.
A. Real GDP
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
II. 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.
A. Labor: An increase in the labor force shifts the long-run aggregate supply curve to the right.
III. Productivity
Total factor productivity (TFP) is the ratio of an economy’s output to its stock of 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.
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
114 Chapter 16: Economic Growth
OPPORTUNITIES FOR DISCUSSION
1. What factors account for U.S. economic growth in the post–World War II period?
2. Why should we care whether the average growth rate is 3 or 2.5 percent?
ANSWERS TO EXERCISES
1. Growth of per capita real GDP is the better measure because if the population grows at a faster
rate than real GDP, the standard of living falls.
3.
Country (Currency)
Average Rate of Growth
of Real GDP (1999–2001)
Average Rate of Growth of
Real per Capita GDP (1999–
2001)
6. All of the factors cited in the discussion of the U.S. productivity slowdown relate to a reduction in
TFP and in the rate of growth in real GDP for the U.S. economy.
7. In the 1970s, the baby boom accounted for a large infusion of less skilled workers into the labor
8. Because of fewer technological innovations and a shortage of capital, developing countries tend to
Chapter 16: Economic Growth 115
9. As the population ages, the rate of labor force growth slows. This leads, everything else held
constant, to slower economic growth.
10.
3.61 percent−
14. Total factor productivity (TFP) is the overall productivity of the economy in terms of the
productivity of both capital and labor. Labor productivity is simply the output per unit of labor
national productivity because it is more easily measured than TFP.
15.
a. Productivity would rise.
16. The more developed a country’s financial markets, the more efficient are the funding sources for
ANSWERS TO STUDY GUIDE HOMEWORK
1.
2. Growth is a rightward shift in AS, caused by increases in either technology or the amount and
quality of resources available.
3. Any factor that affects how goods and services are produced can affect productivity. These factors
include changes in the quality of labor, changes in the frequency of technological innovations,
5. West Podunk’s GDP is growing faster (28.7% versus 20.6%), and its GDP per capita is higher in
2009 (10,191 versus 9,796), but its GDP per capita is growing at a lower rate (10.8% versus
13.7%).
116 Chapter 16: Economic Growth
ACTIVE LEARNING EXERCISE
In this exercise, students will solve three problems involving economic growth rates. By using the
formula in Section 3.a., students should have little difficulty in calculating economic growth. More
Divide the class into groups of three or four students. Each group must solve the following problems
and have a spokesperson prepared to explain the solution to the rest of the class. A different group will
be called upon to explain the answer to each question.
1. What is the growth rate for an economy where there is no growth of resources, but TFP grows at a
rate of 1 percent per year?
2. What is the growth rate for an economy where TFP is constant, labor grows at a rate of 1 percent
per year, capital grows at a rate of 2 percent per year, and labor’s share of output equals 60
percent, while capital’s share equals 40 percent?
3. What is the growth rate for an economy where TFP grows at a rate of 3 percent per year, the size
of the labor force is unchanged, the capital stock grows at a rate of 2 percent per year, and labor
and capital each account for 50 percent of output?