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22

Economic Growth

Learning Objectives
 Economic growth rate and the implications of sustained growth  The economic growth trends in Canada and other countries and regions  Labour productivity growth and potential GDP growth  Sources of labour productivity growth  The theories of economic

 Real GDP per person in Canada tripled between 1961 and 2011.  What has brought about this growth in production, incomes, and living standards?

 Incomes in China have tripled in the 13 years between 1997 and 2010.  Why are incomes in China growing so rapidly?

The Basics of Economic Growth
Economic growth is the sustained expansion of production possibilities measured as the increase in real GDP over a given period.

Calculating Growth Rates The economic growth rate is the annual percentage change of real GDP.

The economic growth rate tells us how rapidly the total economy is expanding.

The Basics of Economic Growth
The standard of living depends on real GDP per person.

Real GDP per person/Per capita income

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

The Basics of Economic Growth
Applying the Rule of 70
Figure 22.1 shows the doubling time for growth rates. A variable that grows at 7 percent a year doubles in 10 years.

A variable that grows at 2 percent a year doubles in 35 years. A variable that grows at 1 percent a year doubles in 70 years.

Economic Growth Trends
Growth in the Canadian Economy
 From 1926 to 2010, growth in real GDP per person in Canada averaged 2% a year.  Real GDP per person fell precipitously during the Great Depression and rose rapidly during World War II.  Growth was most rapid during the 1960s.  Growth slowed during the 1970s and sped up again in the 1980s and1990s.

Economic Growth Trends
Real GDP Growth in the World Economy Figure 22.3(a) shows the growth in the rich countries. Japan grew rapidly in the 1960s, slower in the 1980s, and even slower in the 1990s. Growth in Canada, the United States, and Europe Big 4 has been similar.

Economic Growth Trends
Figure 22.3(b) shows the growth of real GDP per person in group of poor countries. The gaps between real GDP per person in Canada and in these countries have widened.

How Potential GDP Grows
What Determines Potential GDP?
Potential GDP is the quantity of real GDP produced when the quantity of labour employed is the full-employment quantity. To determine potential GDP we use a model with two components:

 An aggregate production function  An aggregate labour market

How Potential GDP Grows
Aggregate Production Function
Ceteris Paribus, the aggregate production function shows how real GDP changes as the quantity of labour changes.

An increase in labour increases real GDP.

How Potential GDP Grows
Aggregate Labour Market  The demand for labour shows the quantity of labour demanded and the real wage rate.

 The supply of labour shows the quantity of labour supplied and the real wage rate.

 The labour market is in equilibrium at the real wage rate at which the quantity of labour demanded equals the quantity of labour supplied.

How Potential GDP Grows
Labour market equilibrium occurs at a real wage rate of $35 an hour and 200 billion hours employed.
At a real wage rate above $35 an hour, there is a surplus of labour and the real wage rate falls.

Figure 22.5: Labour market equilibrium.

How Potential GDP Grows
At a real wage rate below $35 an hour, there is a shortage of labour and the real wage rate rises.
At the labour market equilibrium, the economy is at full employment.

How Potential GDP Grows

Potential GDP
The quantity of real GDP produced when the economy is at full employment is potential GDP. The economy is at fullemployment when 200 billion hours of labour are employed. Potential GDP is $13 trillion.

How Potential GDP Grows
What Makes Potential GDP Grow? We begin by dividing real GDP growth into the…