2 ECONOMIC GROWTH

After studying this chapter, you will be able to:

 Define and calculate the economic growth rate ( 成長率
not 增長率 ) and explain the implications of sustained
growth
 Describe the economic growth trends in the United
States and other countries and regions
 Explain what makes potential GDP grow
 Explain the sources of labor productivity growth
 Explain the theories of economic growth and policies to
increase its rate

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??? U.S. real GDP per person and the standard of
living tripled between 1960 and 2010.

2024 表 1 GDP 及經濟成長率 (Taiwan)

We see even more dramatic change in China, where

incomes have tripled not in 50 years but in the 13 years
since 1999.

Incomes are growing rapidly in some other economies

of Asia, Africa, and South America.

What are the forces that make real GDP grow?

表 11 主要國家經濟成長率 (particularly for China)

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 The Basics of Economic Growth

Economic growth is the sustained expansion of production

possibilities measured the increase in real GDP over a
given period.
Calculating Growth Rates
The economic growth rate is the annual percentage
change of real GDP. ( 看 “名目” GDP 經濟成長率 : 沒意義 !)
The economic growth rate tells us how rapidly the total
economy is expanding.

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 The Basics of Economic Growth

The standard of living depends on real GDP per person.

Real GDP per person is real GDP divided by the

population.

Real GDP per person grows only if real GDP grows faster
than the population grows.

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 The Basics of Economic Growth

Economic Growth Versus Business Cycle Expansion

Real GDP can increase for two distinct reasons:

1.The economy might be returning to full employment in an

expansion phase of the business cycle.

2.Potential GDP might be increasing.

The return to full employment in an expansion phase of the

business cycle isn’t economic growth. ( 閒置的產能重新生產，恢復原狀
不是 經濟成長 )

The expansion of potential GDP is economic growth.

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 The Basics of Economic Growth

Figure 23.1 illustrates the

distinction.
A return to full employment in a
business cycle expansion is a
movement from inside the PPF
(point A) to a point on the PPF
(point B). 在 A 點有產能閒置、失業、浪費…
etc.
Economic growth is the
outward shift of the PPF from
PPF0 to PPF1 and the movement
from point B on PPF0 to point C
on PPF1.

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 The Basics of Economic Growth

The figure shows the

growth rate of real GDP.
The growth rate of
potential GDP measures
the pace of expansion of
production possibilities
and …
smooths out the
business cycle
fluctuations in the growth
rate of real GDP.

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 The Basics of Economic Growth

The Magic of Sustained Growth

The Rule of 70 states that the number of years it takes
for the level of a variable to double is approximately 70
divided by the annual percentage growth rate of the
variable.

70/7 (%) = 10 years to double

70/10 (%) = 7 years

70/3.5 (%) = 20 years, (1+0.035)^20 = 1.99

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 The Basics of Economic Growth

Applying the Rule of 70

Figure 23.3 shows the
doubling time for growth rates.
A variable that grows:
At 7 percent a year doubles
in 10 years.
At 2 percent a year doubles
in 35 years.
At 1 percent a year doubles
in 70 years.

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 Long-Term Growth Trends

Long-Term Growth in the U.S. Economy

From 1901 to 2021, growth in real GDP per person in the
United States averaged 2 percent a year.
Real GDP per person fell precipitously during the Great
Depression and rose rapidly during World War II.
Growth averaged 3 percent a year during the 1960s.
Growth picked up somewhat during the 1980s and even
more during the dot.com expansion of the 1990s, but the it
never returned to the rate achieved during the 1960s.
Figure 23.4 on the next slide illustrates.

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Long-Term Growth Trends

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 Long-Term Growth Trends
Real GDP Growth in the
World Economy
Figure 23.5(a) shows the
growth in rich countries.
Japan had the fastest
growth rate before 1990,
but after the mid-1990s
Japan’s economy grew
more slowly.
Growth in Europe Big 4 (uk,
fr, de, it), Canada, and the
United States has been
similar.
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 Economic Growth Trends

Figure 23.5(b) shows the

growth of real GDP per
person in a group of poor
countries.
The gap between the
United States and Mexico
has widened
Since 2000, the gaps for
Russia and Nigeria have
narrowed slightly.

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 How Potential GDP Grows

Economic growth occurs when real GDP increases.

But a one-shot increase in real GDP or a recovery from
recession is not economic growth.
Economic growth is the sustained, year-on-year increase
in potential GDP. Q

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 How Potential GDP Grows

What Determines Potential GDP?

Potential GDP is the quantity of real GDP produced when
the quantity of labor employed is the full-employment
quantity.
To determine potential GDP we use a model with two
components:
 An aggregate (adj.) production function
 An aggregate labor market

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 How Potential GDP Grows

Aggregate Production
Function
The aggregate production
function tells us how real
GDP changes as the
quantity of labor changes
when all other influences on
production remain the same.
An increase in labor hours
increases real GDP.

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 How Potential GDP Grows

Aggregate Labor Market

The demand for labor shows the quantity of labor
demanded (LD) and the real wage rate (W/P).
The real wage rate is the money (nominal) wage rate
divided by the price level (W/P).
The supply of labor (LS) shows the quantity of labor
supplied and the real wage rate.
The labor market is in equilibrium at the real wage rate
at which the quantity of labor demanded equals the
quantity of labor supplied.

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 How Potential GDP Grows

Figure 23.7 illustrates labor

market equilibrium.
Labor market equilibrium
occurs at a real wage rate
of $40 an hour and 250
billion hours employed.
At a real wage rate above
$40 an hour, there is a
surplus of labor and the
real wage rate falls.

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 How Potential GDP Grows

At a real wage rate below

$40 an hour, there is a
shortage of labor and the
real wage rate rises.
At the labor market
equilibrium, the economy
is at full employment. Q
(any unemployment?)

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 How Potential GDP Grows

Potential GDP
The quantity of real GDP
produced (when the economy
is at full employment is
potential GDP). 上圖 : 有沒有失業 ??
Q
The economy is at full-
employment when 250 billion
hours of labor are employed.
Potential GDP is $20 trillion.

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 How Potential GDP Grows

What Makes Potential GDP Grow?

We begin by dividing real GDP growth into the forces
that increase:
Growth in the supply of labor ( 人口政策很重要 !)
See: birth, population.xls
Growth in labor productivity (R&D, education)

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 How Potential GDP Grows

Growth in the Supply of Labor

Aggregate hours ( 總工作時數 , 比較精確 ), the total number of hours
worked by all the people employed, change as a result of
changes in:
1. Average hours per worker
2. Employment-to-population ratio ( 注意定義 !)
3. The working-age population growth
Population growth increases aggregate hours and real
GDP, but to increase real GDP per person, labor must
become more productive.

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 How Potential GDP Grows

The Effects of Population Growth

An increase in population increases the supply of labor.
With no change in the demand for labor, the equilibrium
real wage rate falls and the aggregate hours increase.
The increase in the aggregate hours increases potential
GDP.
How about immigrants? US, Europe, Taiwan…(capital and
entrepreneurship), Taiwanese students in US (doctors,
professors,…)
Ex: 曹興誠 (was sg, now tw) 、張虔生…

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 How Potential GDP Grows

Figure 23.9(a) illustrates

the effects of population
growth in the labor market.
The labor supply curve
shifts rightward.
The real wage rate falls …
and aggregate hours
increase.

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 How Potential GDP Grows
As aggregate hours
increase, potential GDP
increases.
The increased
population increases real
GDP, but …
Because of the
diminishing returns, the
increased population
increases real GDP (20 增
加到 24) but decreases real
GDP per hour of labor.
(20/250=0.08 下降到
24/350=0.069, 勞動的報酬率下降 )
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 How Potential GDP Grows

Growth of Labor Productivity

Labor productivity is the quantity of real GDP produced
by an hour of labor. (Y/L)
Labor productivity equals real GDP divided by aggregate
labor hours. (Y/L)
If labor become more productive, firms are willing to pay
more for a given number of hours, so the demand for labor
increases. (i.e. Y/L 上升 => Ld 上升 , 向右移 (=> W 上升 ) )

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 How Potential GDP Grows

Figure 23.10 shows the

effect of an increase in labor
productivity.
The increase in labor
productivity shifts the
production function upward.
In the labor market, the
increase in labor productivity
increases the demand for
labor (LD0=>LD1).

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 How Potential GDP Grows

With no change in the supply of

labor, the real wage rate rises
…
and aggregate hours increase.
The increase in aggregate
hours increases potential GDP
along PF1 from B to C.
(A=>B due to an increase in labor
productivity;
B=>C due to an increase in labor
input)
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 Why Labor Productivity Grows

Preconditions for Labor Productivity Growth

The fundamental precondition for labor productivity growth
is the incentive system created by firms, markets,
property rights, and money (monetary exchange).
With preconditions for labor productivity growth in place,
three things influence its pace:
Physical capital growth (more machines, IT inputs)
Human capital growth (more education, training)
Technological advances (more R&D)

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 Why Labor Productivity Grows

Physical Capital Growth

The accumulation of new capital increases capital per
worker and increases labor productivity.
Human Capital Growth
Human capital acquired through education, on-the-job
training ( 在職訓練 ), and learning-by-doing is the most
fundamental source of labor productivity growth.
Technological Advances
Technological change—the discovery and the application
of new technologies and new goods—has contributed
immensely (massively) to increasing labor productivity.
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 Why Labor Productivity Grows

Figure 23.11 summarizes the process of growth.

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 Why Labor Productivity Grows

The growth of real GDP also depends on the population

growth rate and the growth rate of real GDP per person.

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 Growth Theories, Evidence, and
Policies
We study three growth theories:
 Classical growth theory (Adam Smith, 經濟學之父 )
 Neoclassical growth theory (Robert Solow’s 新古典 )
 New growth theory (Paul Romer, NYU, 2018 獲得諾貝爾經濟學
獎 , now B College not B univ., advisor: Robert Lucas 1995
獲得諾貝爾經濟學獎 )
Classical Growth Theory
Classical growth theory is the view that the growth of
real GDP per person is temporary and that when it rises
above the subsistence level, a population explosion
eventually brings real GDP per person back to the
subsistence level.
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 Growth Theories, Evidence,
and Policies
Modern-Day Malthusians
Many people today are Malthusians.
They say that if today’s global population of 7.8 billion
explodes to 11 billion by 2050 and perhaps 35 billion by
2300, we will run out of resources, …
real GDP per person will decline and we will return to a
primitive ( 原始的 ) standard of living.
We must, say Malthusians, contain population growth.
(Malthusians 理論如果要成立的話，人口一定要持續成長 , but?)

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 馬爾薩斯主義

• 馬爾薩斯主義認為人口可能呈指數級增加，而食品供應或其他資源則呈線性增加，最終大量人
口會因為糧食增長的速度跟不上人口增長的速度而死亡。這一情況被稱為馬爾薩斯災難，一旦
農業生產跟不上人口增長，就會導致饑荒或戰爭，並且出現貧困和人口減少等情況。
• 歷史的證據顯示馬爾薩斯理論不成立，他的看法太悲觀

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Classical Theory of Population Growth
There is a subsistence real wage rate, which is the
minimum real wage rate needed to maintain life.
(subsistence level 勉強餬口的生活水準 )
Advances in technology lead to investment in new capital.
Labor productivity increases and the real wage rate rises
above the subsistence level.
When the real wage rate is above the subsistence level,
the population grows.
Population growth increases the supply of labor and brings
diminishing returns to labor.
(Y/L up => W/P up => population up => Ls up => W/P down)
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As the population increases the real wage rate falls.
The population continues to grow until the real wage rate
has been driven back to the subsistence real wage rate.
At this real wage rate, both population growth and
economic growth stop.
Contrary to the assumption of the classical theory, the
historical evidence is that
 population growth rate is not tightly linked to income
per person, and
 population growth does not drive incomes back down
to subsistence levels.
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 Growth Theories, Evidence,
and Policies
Neoclassical Growth Theory (vs new classical 新興 )
Neoclassical growth theory is the proposition that real
GDP per person grows because technological change
induces a level of saving (why saving? 下一頁 ) and
investment that makes capital per hour of labor grow.
(tech => S & I => K/L increase)
儲蓄增加 = 投資增加 => 資本存量增加 => K/L 增加 => 產出增加
Growth ends only if technological change stops because
of diminishing marginal returns to both labor and capital.
Proposed by Robert Solow of MIT in the 1950s

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 The neoclassical growth model

• The neoclassical growth model assumes the existence of an

aggregate production function Y = F(K, N), where Y is aggregate
output, K is the capital stock, and N is the number of workers. The
production function has constant returns to scale (if K and N
change in the same proportion, Y will also change in that
proportion), with positive but diminishing marginal products of
capital and labor. Dividing by the number of workers N, output per
capita y = Y/N is a function of the capital/labor ratio k = K/N:
y = f(k)
and y = c + i, where c = C/N is consumption per capita and i = I/N is
investment per capita. The per capita consumption function is
assumed to be c = (1–s)y, where s is the marginal propensity to save
and (1–s) is the marginal propensity to consume. In equilibrium,
(desired) investment is equal to saving, i = sy = sf(k).

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 Growth Theories, Evidence,
and Policies
The Neoclassical Theory of Population Growth
1. The neoclassical view is that the population growth rate
is independent of real GDP and the real GDP growth
rate. (i.e. 實質 GDP 成長 & 成長率與人口成長是獨立、不相關 )
Technological Change and Diminishing Returns
2. In the neoclassical theory, the rate of technological
change influences the economic growth rate but
economic growth does not influence the pace of
technological change. ( 單向 !)
3. It is assumed that technological change results from
chance ( 靠運氣 ?).
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 古典成長理論與新古典成長理論的差異

• two differences between neoclassical and classical

growth theory
• the first—the different assumptions about how
population growth is determined—reflects an
advance in empirical knowledge of the relationship
between population growth and income.
• The second difference—the importance given to
technological change, saving, and capital—shows
how the neoclassical theory built on the simpler
classical model.

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 Growth Theories, Evidence,
and Policies
Technology begins to advance at a more rapid pace.
New profit opportunities arise and investment and saving
increase.
As technology advances and the capital stock grows,
real GDP per person increases.
Diminishing returns to capital lower the real interest rate
(=nominal interest rate – inflation rate) and eventually growth
slows, just keeps up with population growth. ( 資本的報酬率高 ,
>20% ，利息再貴也會借錢來投資，資本的報酬率如果只有 5% ，表示景氣不是很好，名目
利率不會太高 => lower the real interest rate )
Capital per worker (K/L) remains constant.

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 Growth Theories, Evidence,
and Policies
A Problem with Neoclassical Growth Theory
All economies have access to the same technologies and
capital is free to roam (wander) the globe, seeking the
highest available real interest rate.
These facts imply that economic growth rates and real
GDP per person across economies will converge.
Figure 23.5 shows some convergence among rich
countries, but convergence doesn’t appear imminent
(approaching) for all countries (i.e. convergence is slow).

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Reserve Bank of Australia (RBA) 4.10% Feb 18, 2025

Bank of England (BOE) 4.50% Feb 06, 2025

European Central Bank (ECB) 2.65% Mar 06, 2025

Federal Reserve (FED) 4.50% DEC 18, 2024

Swiss National Bank (SNB) 1.75% Mar 21, 2024

Bank of Canada (BOC) 5.00% Apr 10, 2024

Reserve Bank of New Zealand (RBNZ) 5.50% Apr 10, 2024

Bank of Japan (BOJ) 0.50% Jan 24, 2025

Central Bank of the Russian

21.00% Oct 25, 2024
Federation (CBR)

Reserve Bank of India (RBI) 6.50% Apr 03, 2024

People's Bank of China (PBOC) 3.10% 21/10/2024

Central Bank of Brazil (BCB) 11.25% Mar 20, 2024

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 Growth Theories, Evidence,
and Policies
New Growth Theory
New growth theory holds that real GDP per person grows
because of choices that people make in the pursuit of
profit and that growth can persist indefinitely.
The theory begins with two facts about market economies:
Discoveries result from choices.
Discoveries (innovation) bring profit and competition
destroys profit.
Neoclassical theory also is incomplete because the primary engine of economic
growth, technology, is exogenous. New growth theory attempts to overcome this
weakness

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 Growth Theories, Evidence,
and Policies
Two further facts play a key role in the new growth theory:
1. Discoveries are a public capital good***
2. Knowledge is not subject to diminishing returns***
Knowledge Capital Is Not Subject to Diminishing
Returns ( 知識不會受限於報酬遞減法則 )
Increasing the stock of knowledge makes capital and labor
more productive.
The central proposition of new growth theory is that
knowledge capital does not experience diminishing
returns.

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 Growth Theories, Evidence,
and Policies
Figure 23.12
summarizes
the ideas of
new growth
theory as a
perpetual
motion
machine.

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 Growth Theories, Evidence,
and Policies
Sorting Out the Theories
Each theory teaches us something of value but not the
whole story.
1. Classical theory reminds us that our physical resources
are limited and we need technological advances to
grow.
2. Neoclassical theory emphasizes diminishing returns
to capital means we need technological advances to
grow.
3. New theory emphasizes the capacity of human
resources to innovate at a pace that offsets diminishing
returns.
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 Growth Theories, Evidence,
and Policies
The Empirical Evidence on the Causes of Economic
Growth
Economic growth makes progress by the interplay ( 相互影響 )
of theory and empirical evidence.
Theory makes predictions about what we will observe if it
is correct.
Empirical evidence provides the data for testing the
theory.
Table 23.1 on the next slide summarizes the more robust
influences on growth that economists have discovered.

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Growth Theories, Evidence,
and Policies

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 Growth Theories, Evidence,
and Policies
Policies for Achieving Faster Growth
Growth accounting ( 成長會計 ) tell us that to achieve faster
economic growth we must either increase the growth rate
of capital per hour of labor (K/L) or increase the pace of
technological change (tech).
The main suggestions for achieving these objectives are
1) Stimulate Saving***
Saving finances investment. So higher saving rates might
increase physical capital growth. ( 儲蓄是以犧牲現在的消費為代價，換取未
來的較高消費 )
Tax incentives might be provided to boost saving.

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 Growth Theories, Evidence,
and Policies
2.Stimulate Research and Development
Because the fruits of basic research and development
(R&D) efforts can be used by everyone, not all the benefit
of a discovery falls to the initial discoverer. Ex: CD
(1980s), DVD, Blu-ray
So the market might allocate too few resources to
research and development.
Government subsidies and direct funding might stimulate
basic research and development.

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 Growth Theories, Evidence,
and Policies
3.Improve the Quality of Education
The benefits from education spread beyond the person
being educated, so there is a tendency to under invest in
education.
4.Provide International Aid to Developing Nations
If rich countries give financial aid to developing countries,
investment and growth will increase.
But data on the effect of aid shows that it has had zero or
a negative effect.

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 Growth Theories, Evidence,
and Policies
5.Encourage International Trade
Free international trade stimulates growth by extracting all
the available gains from specialization and trade.
The fastest growing nations are the ones with the fastest
growing exports and imports. (ex: Asian NICs and China)

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