Chapter 8

Economic Growth

PowerPoint Presentation by
Salewa Olawoye-Mann, York University

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 Today

Economic growth

Modern economic growth

Determinants of growth

Growth accounting, Canada

Discussions 2

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rce: https://www.economist.com/graphic-detail/2019/05/04/satellite-data-shed-new-light-on-north-koreas-opaque-economy
 1. Economic growth

Real GDP

Real GDP per capita

4

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 Last week: Real GDP

DIVIDING NOMINAL GDP BY THE PRICE INDEX

Nominal GDP
Real GDP = ´100
Price Index

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 Last week: Real GDP
Nominal GDP Price Index Real GDP
Year 1 $200 100 $200
(Base year)
Year 2 $400 200 ?

Nominal GDP
Real GDP = ´100
Price Index

Year 1: Real GDP = 200 / 100 * 100 = 200

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 Last week: Real GDP
Nominal GDP Price Index Real GDP
Year 1 $200 100 $200
(Base year)
Year 2 $400 200 $200

Nominal GDP
Real GDP = ´100
Price Index

Year 1: Real GDP = 200 / 100 * 100 = 200

Year 2: Real GDP = 400/ 200 * 100 = 200
7
Economic growth from Year 1 to Year 2?
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 Last week: Real GDP
Nominal GDP Price Index Real GDP
Year 1 $200 100 $200
(Base year)
Year 2 $400 200 $200
Year 3 $900 300 $300

Nominal GDP
Real GDP = ´100
Price Index

Year 3: Real GDP = 900/ 300 * 100 = 300

8
Economic growth from Year 2 to Year 3?
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 8.1 ECONOMIC GROWTH

Economists define and measure economic growth as

either:
– An increase in real GDP occurring over some
time period.
– An increase in real GDP per capita occurring
over some time period.

Real GDP per capita = Real GDP/population

8.9

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 8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Real GDP
Year 1 $100
Year 2 $180

Real GDP growth from year 1 to year 2?

8.1
0

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 8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Real GDP
Year 1 $100
Year 2 $180

Real GDP growth from year 1 to year 2?

(Year 2 real GDP – Year 1 real GDP)

Growth rate (%) = X 100
Year 1 real GDP 8.1
1

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 8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Real GDP
Year 1 $100
Year 2 $180

Real GDP growth from year 1 to year 2?

( 180 - 100 )
80% = X 100
100 8.1
2

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 8.1 ECONOMIC GROWTH
REAL GDP PER CAPITA

Real GDP
Real GDP per capita =
Population

8.1
3

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 8.1 ECONOMIC GROWTH

Real GDP (RGDP) per capita

Real GDP Population Real GDP per
capita
Year 1 $100 5 $100/5 = 20
Year 2 $180 6

8.1
4

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 8.1 ECONOMIC GROWTH

Real GDP (RGDP) per capita

Real GDP Population Real GDP per
capita
Year 1 $100 5 $100/5 = 20
Year 2 $180 6 $180/6 = 30

8.1
5

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 8.1 ECONOMIC GROWTH

Real GDP (RGDP) per capita

Real GDP Population Real GDP per
capita
Year 1 $100 5 $100/5 = 20
Year 2 $180 6 $180/6 = 30

Real GDP per capita growth rate?

RGDP per capita (Year 2 RGDP per cap. – Year 1 RGDP per cap.)
= X 100 8.1
growth rate (%) Year 1 RGDP per cap 6

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 8.1 ECONOMIC GROWTH

Real GDP (RGDP) per capita

Real GDP Population Real GDP per
capita
Year 1 $100 5 $100/5 = 20
Year 2 $180 6 $180/6 = 30

Real GDP per capita growth rate?

( 30 – 20 )
50% = X 100 8.1
20 7

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 8.1 ECONOMIC GROWTH

GROWTH AS A GOAL
• Growth is a widely held economic goal

• Growth raises standards of living

• Growth lessens the burden of scarcity

8.18

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 8.1 ECONOMIC GROWTH

ARITHMETIC OF GROWTH
• Rule of 70
Approximate 70
number of years = annual percentage rate
required to double
of growth
real GDP

• For example, a 5% annual rate of growth will double real

GDP in about 14 years (= 70/5). 8.19

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 Rule of 70
Real GDP Log Real GDP Growth rate
Year 1 1 ln(1) = 0 1%
Year 2 1*1.01 = 1.01 ln(1) + ln(1.01) = 0.01 1%
Year 3 1*1.01*1.01 = 1.0201 ln(1) + 2*ln(1.01) = 0.02 1%
Year 4 1*1.01^3 = 1.0303 ln(1) + 3*ln(1.01) = 0.03 1%
… … … …
Year 70 1*1.01^70 = 2.0068 ln(1) + 70*ln(1.01) = 1%
0.6965 = ln(2.0068)

Q: Growth rate 1%. What is the unknown x such that

(1+0.01)^x ≈ 2
ó log(1+0.01)*x ≈ log(2) ó x ≈ log(2)/ log(1+0.01)
20
ln(2) = 0.6931, ln(1+0.01) ≈ 0.01
ln(2)/ln(1+0.01) ≈ 70/1
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 Table 8.1 Real GDP and Per Capita GDP, 1961-2017

(1) (2) (3) (4)

Year GDP (billions Population Per capita GDP (2002 $) (2) / (3)
of 2002 $) (million)
1961 322.7 18.3 17,633
1966 439.1 20.1 21,845
1971 534.0 22.0 24,272
1976 668.9 23.2 28,831
1981 789.8 24.9 31,171
1986 888.9 26.2 33,965
1991 977.3 28.1 34,779
1996 1116.8 29.7 37,602
2001 1348.3 31.1 43,353
2006 1541.6 32.7 47,143
2017 1844.4 36.7 50,256 8.21
Source: Statistics Canada. Canadian Economic Observer: Historical Statistical Supplement.

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 Growth – very long run

22

Source: Jones, C.I. (2016) The Facts of Economic Growth In J. B. Taylor and H. Uhlig (Ed.), Handbook of Macroeconomics (pp.3-69)
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 8.1 ECONOMIC GROWTH
GROWTH IN CANADA DOES NOT ACCOUNT FOR:

• Improved Products and Services

– Vacuum-tube vs. digital computers

• Added Leisure
– The standard workweek, once 50 hours, is now about 35 hours.

• Other Impacts
– Environment and quality of life 8.23

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 2. Modern economic growth

Fast

Uneven

Catch-up
24

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 8.2 MODERN ECONOMIC GROWTH

• The historically recent phenomenon in which nations have

experienced sustained increases in real GDP per capita.

• Dramatic increases in the standard of living.

• Started with the Industrial Revolution of late 1700s

• Prior to 1700s, GDP per capita was flat over long periods of
time.
8.25

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 Economic growth

26

Source: Jones, C.I. (2016) The Facts of Economic Growth In J. B. Taylor and H. Uhlig (Ed.), Handbook of Macroeconomics (pp.3-69)
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 8.2 MODERN ECONOMIC GROWTH
Economic growth has vastly affected cultural, social and
political arrangements:
• Culturally: for the first time in history ordinary people
have significant time for leisure activities and the arts.
• Socially: has allowed for universal public education,
elimination of ancient social norms and legal restrictions
against women and minorities doing certain jobs or
holding certain positions.
• Politically: countries experiencing modern economic 8.27
growth have tended to move toward democracy.
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 8.2 MODERN ECONOMIC GROWTH
THE UNEVEN DISTRIBUTION OF GROWTH

• Modern economic growth has spread slowly from its

British birthplace.

• First advanced to France, Germany, and other parts of

Western Europe in the early 1800s before spreading to
Canada, the United States, and Australia by the late
1800s.
8.28
• Japan began to industrialize in the 1870s.
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 8.2 MODERN ECONOMIC GROWTH
THE UNEVEN DISTRIBUTION OF GROWTH
• Large parts of Central and South America as well as the
Middle East also began to experience economic growth.
• Africa for the most part did not experience sustained
economic growth until the past 20 years.
• Some parts of Asia did not follow until the early to mid-
1900s.
• Some parts of the world have yet to experience economic
8.29
growth at all.
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 FIGURE 8-1: THE GREAT DIVERGENCE IN LIVING
STANDARDS

8.30

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 8.2 MODERN ECONOMIC GROWTH

CATCHING UP IS POSSIBLE
• Leader countries: As it relates to economic growth,
countries that develop and use advanced technologies,
which then become available to follower countries.

• Follower countries: As it relates to economic growth,

countries that adopt advanced technologies that
previously were developed and used by leader countries.
8.31

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 8.2 MODERN ECONOMIC GROWTH

8.32

Source: Jones, C.I. (2016) The Facts of Economic Growth In J. B. Taylor and H. Uhlig (Ed.), Handbook of Macroeconomics (pp.3-69)
Copyright © 2019 by McGraw-Hill Education. All rights reserved.
 Table 8.2 Real GDP Per Capita in 1960 and 2010 (plus
average annual growth rates of GDP per capita 1960-
2010 for eight selected countries, 2005 dollars)

Real GDP per Real GDP per Average annual growth

Country
capita, 1960 capita, 2007 rate, 1960-2010
United States 14,776 41,365 2.1
Canada 12,901 37,110 2.1
United Kingdom 11,257 34,268 2.2
France 9,347 31,299 2.4
Ireland 6,666 34,877 3.3
Japan 5,472 31,477 3.5
Singapore 4,149 55,862 5.2
Hong Kong 3,849 38,865 4.6
South Korea 1,765 26,609 5.4

Source: Penn World Table version 67.1.

Note: GDP figures for all countries are measured in “international dollars” of equal value to U.S. dollars in 8.33
2005.

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 8.2 MODERN ECONOMIC GROWTH

8.34

Source: Jones, C.I. (2016) The Facts of Economic Growth In J. B. Taylor and H. Uhlig (Ed.), Handbook of Macroeconomics (pp.3-69)
Copyright © 2019 by McGraw-Hill Education. All rights reserved.
 8.2 MODERN ECONOMIC GROWTH

INSTITUTIONAL STRUCTURES THAT PROMOTE

GROWTH
– Strong Property Rights

– Patents and Copyrights

– Efficient Financial Institutions

– Literacy and Education

– Free Trade
8.35
– Competitive Market System

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 3. Determinants of growth

Supply

Demand

Efficiency
36

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 8.3 DETERMINANTS OF GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH
• Supply Factors
1. increases in the quantity and quality natural
resources,

2. increases in the quantity and quality of human

resources,

3. increases in the supply (or stock) of capital goods, and

8.37
4. improvements in technology.
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 8.3 DETERMINANTS OF GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH
• Demand Factor
5. The increase in aggregate demand that brings about
the economic growth made possible by an increase in
the production potential of the economy.

– If that occurs, there will be no unplanned increases in

inventories, and resources will remain fully employed.

8.38

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 8.3 DETERMINANTS OF GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH

Efficiency Factor

6. The capacity of an economy to combine resources

effectively to achieve growth of real output that the
supply factors make possible.

– Least costly way (productive efficiency)

– Maximum well-being (allocative efficiency)

8.39

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 FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Capital Goods

8.40
B D
Consumer Goods
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 FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Economic
Capital Goods

Growth

8.41
B D
Consumer Goods
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 FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Economic
Capital Goods

Growth

c b
a

8.42
B D
Consumer Goods
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 8.3 DETERMINANTS OF GROWTH

LABOUR AND PRODUCTIVITY

• Decompose real GDP growth
– Real GDP = worker-hours x labour productivity
– % change in GDP = % change in worker-hours + % change in
productivity.
• Labour productivity
– the average product of labour.
– output per worker per hour.
• Labour force participation rate
– The percentage of the working age population that is actually in the 8.43
labour force.
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 FIGURE 8-3: THE SUPPLY DETERMINANTS OF REAL
OUTPUT

•Size of employed
labour force

•Average hours of
work

•Technological
advance
•Quantity of capital
•Education and
training
•Allocative
efficiency
•Other
8.44

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 FIGURE 8-3: THE SUPPLY DETERMINANTS OF REAL
OUTPUT

•Size of employed
labour force Labour
Inputs
•Average hours of (hours of
work work)

•Technological
advance
•Quantity of capital
•Education and
training
•Allocative
efficiency
•Other
8.45

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 FIGURE 8-3: THE SUPPLY DETERMINANTS OF REAL
OUTPUT

•Size of employed
labour force Labour
Inputs
•Average hours of (hours of
work work)

•Technological
advance
•Quantity of capital Labour
Productivity
•Education and (average
training output per
•Allocative hour)
efficiency
•Other
8.46

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 FIGURE 8-3: THE SUPPLY DETERMINANTS OF REAL
OUTPUT

•Size of employed
labour force Labour
Inputs
•Average hours of (hours of
work work)

•Technological
×
advance
•Quantity of capital Labour
Productivity
•Education and (average
training output per
•Allocative hour)
efficiency
•Other
8.47

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 FIGURE 8-3: THE SUPPLY DETERMINANTS OF REAL
OUTPUT

•Size of employed
labour force Labour
Inputs
•Average hours of (hours of
work work)

•Technological
× Real
=
advance GDP
•Quantity of capital Labour
Productivity
•Education and (average
training output per
•Allocative hour)
efficiency
•Other
8.48

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 4. Growth accounting - Canada

Supply

Efficiency

Structural change
49

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 8.4 ACCOUNTING FOR GROWTH IN
CANADA
• Output growth in Canada has been considerably greater in the
last half century than can be attributed solely to increases in
the inputs of labour and capital.
• Two other factors are involved:
1. Interindustry shifts from lower- to higher-productivity
occupations.

2. Multifactor productivity (MFP) growth

– efficiency with which factors are used together in the
production process
8.50

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 Table 8.3 Annual Average Growth Rates of Productivity in
Canada, 1946-2015*

Years Output Employment Hours worked Output per Output

worker per hour

1946-2015 3.6 1.6 1.2 1.9 2.3

1946-1973 5.0 1.6 0.9 3.3 4.0
1973-1981 3.5 2.7 2.0 0.8 1.4
1981-1989 3.1 1.8 1.8 1.2 1.3
1989-2000 2.9 1.4 1.2 1.6 1.7
2000-2015 1.8 1.2 0.9 0.6 0.9
*The business sector
Source: Centre for the Study of Living Standards.

8.51

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 8.4 ACCOUNTING FOR GROWTH IN
CANADA

8.52

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 8.4 ACCOUNTING FOR GROWTH IN
CANADA
REASONS FOR GROWTH
• Inputs versus productivity

• Quantity of labour

• Technological advances (largest)

• Quantity of capital (e.g. public investment in

infrastructure)
8.53
• Education and training (human capital)

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 8.4 ACCOUNTING FOR GROWTH IN
CANADA
ECONOMIES OF SCALE AND RESOURCE ALLOCATION

• ECONOMIES OF SCALE: Reductions in the average total cost

of producing a product as the firm expands the size of plant
(its output) in the long run

• IMPROVED RESOURCE ALLOCATION: workers have moved

over time from low-productivity employment to high-
productivity employment 8.54

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 8.4 ACCOUNTING FOR GROWTH IN
CANADA

8.55

Source: Jones, C.I. (2016) The Facts of Economic Growth In J. B. Taylor and H. Uhlig (Ed.), Handbook of Macroeconomics (pp.3-69)
Copyright © 2019 by McGraw-Hill Education. All rights reserved.
 5. Discussions

Demographics

Sustainable growth
56

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 Aging population

57

Source: Statistics Canada (1971-2010) and Office of the Superintendent of Financial Institutions (2020-2080)
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 8.6 IS ECONOMIC GROWTH
DESIRABLE AND SUSTAINABLE?
THE ANTI-GROWTH VIEW
– Industrialization and growth result in pollution, global
warming, and other environmental problems.
– No evidence that economic growth has solved
sociological problems such as poverty, homelessness,
and discrimination.
– Growth permits us to “make a better living,” it does
not give us “the good life”.
– High growth rates are not sustainable. 8.58

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 8.6 IS ECONOMIC GROWTH
DESIRABLE AND SUSTAINABLE?
IN DEFENCE OF GROWTH
– The path to the greater material abundance and higher
living standards is desired by the majority of people.
– Economic growth has not made labour more
unpleasant or hazardous.
– Growth has allowed economies to reduce pollution,
and be more sensitive to environmental considerations.
– Growth is sustainable because it has more to do with
the expansion and application of human knowledge
8.59
and information than extractable natural resources.
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 The LAST WORD Can Economic Growth Survive Population Decline?

The Demographic Transition Is Causing Greying Populations,

Shrinking Labour Forces, and Overall Population Decreases in
Many Nations. Can Economic Growth Survive?

• Real GDP = hours of work x labour productivity

• Hours of work depend on the size of the working-age population.
• If working-age population falls, hours of work falls.
• Labour productivity must increase faster than hours of work
decreases for real GDP to rise.
• Total fertility rate is below the replacement level for many nations.
• In Canada, the inverse dependency ratio is set to fall from 1.5 in
2010 to 1.16 in 2050.
• Economists are uncertain if the increase in productivity is 8.60
sufficiently large to keep standards of living from falling.
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 CHAPTER SUMMARY
LO8.1 List two ways that economic growth is measured.
LO8.2 Define modern economic growth and explain the
institutional structures needed for an economy to
experience it.
LO8.3 Identify the general supply, demand, and efficiency
forces that give rise to economic growth.
LO8.4 Describe growth accounting and specific factors
accounting for economic growth in Canada.
LO8.5 Explain the recent trend toward productivity
acceleration.
LO8.6 Discuss differing perspectives as to whether growth is
desirable and sustainable. 8.61

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