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Financial Development

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  1. 17 C H A P T E R ECONOMIC GROWTH

  2. GROWTH ECONOMICS Supply Factors • Increases in the Quantity & Quality of Natural Resources • Increases in the Quantity & Quality of Human Resources • Increases in the Supply (or Stock) of Capital Goods • Improvements in Technology

  3. GROWTH ECONOMICS Demand Factor • Households, Businesses, and Government Must Purchase the Economy’s Expanded Output Efficiency Factor • The Economy Must Achieve Economic Efficiency as well as Full Employment

  4. PRODUCTION POSSIBILITIES ANALYSIS Economic Growth C A b Capital Goods a 0 B D Consumer Goods

  5. Hours of Work Labor Productivity = X Real GDP PRODUCTION POSSIBILITIES ANALYSIS Growth and Production Possibilities Labor and Productivity Hours of Work Labor-Force Participation Rate Labor Productivity

  6. SUPPLY DETERMINANTS OF REAL OUTPUT • Size of employed labor force • Average hours of work Labor Inputs (Hours of Work) REAL GDP = X • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other Labor Productivity (Average Output Per Hour)

  7. GROWTH IN THE AD-AS MODEL Production Possibilities and Aggregate Supply Extended AD-AS Model

  8. GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C A Price Level Capital Goods Q1 Q2 B D Real GDP Consumer Goods

  9. ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 AS1 Price Level P2 P1 AD2 AD1 o Q1 Q2 Real GDP

  10. 5 4 3 2 1 0 Real GDP Real GDP Per Capita U.S. ECONOMIC GROWTH RATES U.S. Economic Growth, Annual Averages for Five Decades Average Annual Increase (Percent) 1950-1959 1960-1969 1970-1979 1980-1989 1990-1999

  11. ACCOUNTING FOR GROWTH • Growth Accounting • Labor Inputs versus Productivity • Technological Advance • Quantity of Capital • Infrastructure • Education and Training • Human Capital

  12. ACCOUNTING FOR GROWTH Accounting for Growth of U.S. Output, 1960-2008 2002 Q3 to 2008 Q4* 1990 Q3 to 2002 Q3 1973 Q4 to 1990 Q3 1960 Q2 to 1973 Q4 4.2 1.6 2.6 Increase in Real GDP Increase in quantity of labor Increase in labor productivity 2.9 1.6 1.3 2.9 0.9 2.0 3.2 1.4 1.8 *Rates beyond 2002 are projections Source: Economic Report of the President, 2003

  13. 100 80 60 40 20 0 High School Graduates or More College Graduates or More ACCOUNTING FOR GROWTH Changes in the Educational Attainment of the U.S. Adult Population Percent of U.S. Population 1950 1960 1970 1980 1990 2000 Source: U.S. Census Bureau

  14. ACCOUNTING FOR GROWTH Economies of Scale Improved Resource Allocation Other Factors

  15. 1 Singapore 604 1 Taiwan 569 2 South Korea 587 2 Singapore 568 3 Taiwan 585 3 Hungary 552 4 582 4 Japan 550 Hong Kong(China) 5 Japan 579 5 South Korea 549 6 Belgium 558 6 Netherlands 545 7 Netherlands 540 7 Australia 540 8 Slovak Republic 534 8 Czech Republic 539 9 Hungary 532 9 United Kingdom 538 10 Canada 531 10 Finland 535 19 United States 502 18 United States 515 GLOBAL PERSPECTIVE Average Test Scores, 8th. Grade, 1999 Mathematics Rank Score Science Rank Score Source: Third International Math and Science Study

  16. PRODUCTIVITY ACCELERATION: A NEW ECONOMY? • Reasons for the Productivity Acceleration • Microchip and Information Technology • New Firms and Increasing Returns • Start-Up Firms

  17. PRODUCTIVITY ACCELERATION: A NEW ECONOMY? • Sources of Increasing Returns • More Specialized Inputs • Spreading of Development Costs • Simultaneous Consumption • Network Effects • Learning by Doing • Global Competition

  18. PRODUCTIVITY ACCELERATION: A NEW ECONOMY? • Macroeconomic Implications • More Rapid Economic Growth • Low Natural Rate of Unemployment • Growing Tax Revenues • Skepticism About the New Economy

  19. 1 2 3 4 5 6 7 8 9 10 GLOBAL PERSPECTIVE Growth Competitiveness Ranking 2002 Rank United States Finland Taiwan Singapore Sweden Switzerland Australia Canada Norway Denmark Source: World Economic Forum

  20. IS GROWTH DESIRABLE AND SUSTAINABLE? The Antigrowth View In Defense of Economic Growth

  21. KEY TERMS growth accounting infrastructure human capital economies of scale New Economy information technology start-up firms increasing returns network effects learning by doing economic growth supply factors demand factor efficiency factor labor productivity labor-force participation rate BACK END Copyright McGraw-Hill/Irwin, Inc. 2005

  22. Chapter 18 Next... Deficits, Surpluses and the Public Debt