The Growth in Real GDP per Capita, US, 1900–2006

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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 34

Long-run economic growth The process by which rising productivity increases the average standard of living.

The Growth in Real GDP per Capita, US, 1900–2006

Calculating Growth Rates and the Rule of 70

rateGrowth

70 double toyears ofNumber

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The Connection between Economic Prosperity and Health

Makingthe

Connection

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Long-Run Economic Growth

What Determines the Rate of Long-Run Growth?

Capital Manufactured goods that are used to produce other goods and services.

Increases in Capital per Hour Worked

Technological Change

Economic growth depends more on technological change than on increases in capital per hour worked.

Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs.

Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work.

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The Role of Technological Change in Growth

Between 1960 and 1995, real GDP per capita in Singapore grew at an average annual rate of 6.2 percent. This very rapid growth rate results in the level of real GDP per capita doubling about every 11.5 years.

In 1995, Alywn Young of the University of Chicago published an article in which he argued that Singapore’s growth depended more on increases in capital per hour worked, increases in the labor force participation rate, and the transfer of workers from agricultural to nonagricultural jobs than on technological change.

If Young’s analysis was correct, predict what was likely to happen to Singapore’s growth rate in the years after 1995.

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What Explains Rapid Economic Growth in Botswana?

Makingthe

Connection

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Long-Run Economic Growth

Learning Objective 9.1

Potential Real GDP

FIGURE 9.2

Actual and Potential Real GDP

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Saving, Investment, and the Financial System

An Overview of the Financial System

Financial markets Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

Financial system The system of financial markets and financial intermediaries through which firms acquire funds from households.

Channeling resources to productive uses

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The Macroeconomics of Saving and Investment

Y = C + I + G + NX

I = Y − C − G - NX

privateS = Y + TR − C − T = Y - (T -TR) - C

publicS = (T − TR) − G

T - TR = Net taxes

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S = (Y − (T - TR) − C) + ((T − TR) − G)

S = Y − C − G = I + NX

I = S - NX

privateS publicSS = +

or

or

So, we can conclude that total saving must equal total investment:


The Macroeconomics of Saving and Investment

- NX = Capital Inflows

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Demand and Supply in the Loanable Funds Market

The Market for Loanable Funds



Rea

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Explaining Movements in Saving, Investment, and Interest Rates

An Increase in the Demand for Loanable Funds



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Explaining Movements in Saving, Investment, and Interest Rates

The Effect of a Budget Deficit on the Market for Loanable Funds



Crowding out A decline in private expenditures as a result of an increase in government purchases.

The Growth in Real GDP per Capita, US, 1900–2006

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