ECONOMIC GROWTH

I. MEASURING ECONOMIC

GROWTH

Economic Growth

Two concepts are used to measure economic growth:

A. REAL GDP

B. PER CAPITA REAL GDP

REAL GDP

Recall that “GDP” stands for Gross Domestic Product.

Recall that “Real" stands for something that is inflation adjusted

“Real GDP” is inflation adjusted Gross Domestic Product.

REAL GDP

• We define Economic Growth as:

An increase in Real GDP

Percentage Change in Real GDP

Economic growth is commonly measured as a percentage change in the real GDP.

Percent change in real GDP =

[Change in GDP over a year] * 100

[The Beginning value of GDP]

INCREASES IN PER CAPITA REAL GDP

Per Capita Real GDP is defined as:

REAL GDP

POPULATION

Increases in Per Capita Real GDP

Increases in Per Capita Real GDP would be seen as an increase in that number.

It is really a very crude measure of economic growth.

II. WHAT DETERMINES ECONOMIC GROWTH?

What Determines Economic Growth?

While economists know far more about what determines economic growth, we still don’t have a complete set of answers.

Neither do the people in Washington, or those who are busy exporting any quick fix solution.

What is Economic Development?

Usually when economists talk about economic growth, what they really mean is ECONOMIC DEVELOPMENT.

Economic growth and economic development are not the same!

What is Economic Development?

Economic development is harder to define and measure.

Economic development is defined as:

A SELF-SUSTAINING TRANSFORMATION OF THE ECONOMY OF A SOCIETY.

Economic Growth vs. Economic Development

You can’t have economic development without economic growth.

But you can have economic growth without economic development.

An economy can expand, without any technological or social changes.

THE IMPORTANCE OF THE FACTORS OF

PRODUCTION:LABOR, CAPITAL, LAND

LABOR

Labor is defined as:

The total physical and mental effort expended by people in the production of goods and services.

LABOR

LABOR is the most important determinant for economic growth and development.

It is not just the size of the labor force that matters.

The quality of the labor force is more important.

LABOR

When we talk about quality of a labor force, we mean the level of education.

The more highly educated a labor force is, the more likely a country will be able to develop.

The key here is universal primary education, which is more important than number of college students.

CAPITAL

We define capital as:

Human made products used to produce other products.

CAPITAL

The ability of a country to grow, but especially to develop, depends upon its ability to purchase or create capital goods.

But the ability to obtain capital goods depends upon the ability to obtain money to buy or produce them.

CAPITAL AND THE POVERTY TRAP

Poor countries have to obtain money to buy or to develop capital goods.

But because they are poor, they have little savings to do either.

LAND

Land is defined as:

All types of natural resources.

LAND

We have learned that an abundance of natural resources is not a necessary condition for economic growth.

East Asia is the outstanding example of this.