CHAPTEREconomic Growth, the Financial10System, and Business CyclesChapterOutlineandLearningObjectives10.1Long-RunEconomicGrowth10.2Saving,Investment,andthe Financial System10.3TheBusinessCycle
1 Chapter Outline and Learning Objectives 10.1 Long-Run Economic Growth 10.2 Saving, Investment, and the Financial System 10.3 The Business Cycle CHAPTER 10 CHAPTER Economic Growth, the Financial System, and Business Cycles
Obtaining EconomicGrowthWe all want the United States to have a “strong" economy, since thiswill hopefully result in a better life for us and the people we careabout.: What does it mean for the economy to be “strong" vs. “weak"?In this chapter, we will explore what the concepts mean in the longterm, and also in the short-term.: In the short-term, this refers to the business cycle: alternatingperiods of economic expansion and economic recession.Wewill alsoexplore what sortsof things seemto lead to astrongervs.weakereconomy.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 Obtaining Economic Growth We all want the United States to have a “strong” economy, since this will hopefully result in a better life for us and the people we care about. • What does it mean for the economy to be “strong” vs. “weak”? In this chapter, we will explore what the concepts mean in the longterm, and also in the short-term. • In the short-term, this refers to the business cycle: alternating periods of economic expansion and economic recession. We will also explore what sorts of things seem to lead to a stronger vs. weaker economy
Long-RunEconomicGrowth10.1LEARNINGOBJECTIVEDiscusstheimportanceoflong-runeconomicgrowth@2015PearsonEducation,lnc3
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 Long-Run Economic Growth 10.1 Discuss the importance of long-run economic growth
Long-RunEconomicGrowthRealGDPWhenwespeakoflong-runpercapita(2009 dollars)$50.000economicgrowth,wemean45,000the process by which rising40.000productivity increases the35,000average standardof living30,00025,000The most commonly used20,000measure of this average15,000standard of living is real GDP10,000per capita: the amount of5,000production in the economy,0190019101920193019401950196019701980199020002010per person, adjusted forFigure 10.1ThegrowthinrealGDPchanges in the price level.per capita, 1900-2012Asthechartshows,realGDPpercapitahasrisenmorethaneightfold since 1900; the average American can buy more than eighttimes as many goods and services now as in 1900.@2015Pearson Education,Inc
© 2015 Pearson Education, Inc. 4 Long-Run Economic Growth When we speak of long-run economic growth, we mean the process by which rising productivity increases the average standard of living. The most commonly used measure of this average standard of living is real GDP per capita: the amount of production in the economy, per person, adjusted for changes in the price level. As the chart shows, real GDP per capita has risen more than eightfold since 1900; the average American can buy more than eight times as many goods and services now as in 1900. The growth in real GDP per capita, 1900-2012 Figure 10.1
MakingEconomicProsperity andHealththeConnectionEconomicprosperityandLifeexpectancyhealth go hand-in-hand:atbirth1900(years)richernationscandevote201390more resources to80improving the health of70theircitizens,andhealthier60-citizens are more5040productive.30Whilegrowth inreal GDP20per capita is an important10measure ofour0UnitedUnitedIndiaFranceimprovement, anotherStatesKingdomimportant measure is theincrease in our lifespans;these have also increasedmarkedly over the lastcentury.@2015PearsonEducation.nc
© 2015 Pearson Education, Inc. 5 Making the Connection Economic Prosperity and Health Economic prosperity and health go hand-in-hand: richer nations can devote more resources to improving the health of their citizens, and healthier citizens are more productive. While growth in real GDP per capita is an important measure of our improvement, another important measure is the increase in our lifespans; these have also increased markedly over the last century
MakingEconomicProsperityandHealththeConnectionAnother good measure ofLifetimeour economic prosperityhoursis the amount of time we350,000can spend on"leisure".300,000250,000As our lifespan grows,we can spend more time200,000Lifetimediscretionaryhoursonleisure:andalso,asLifetimehoursofpaidwork150,000Lifetimehoursof leisurewegrowmore100,000productive, we can50,000devotelesstimetoworkCandhence moreto199518802040leisure.Thechartshows estimatesfromNobelPrize-winnerRobertVogel,who predicts that improvements in productivity and lifespan willcontinuetoimprovethelivesofAmericansover thecomingdecades@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 Making the Connection Economic Prosperity and Health Another good measure of our economic prosperity is the amount of time we can spend on “leisure”. As our lifespan grows, we can spend more time on leisure; and also, as we grow more productive, we can devote less time to work, and hence more to leisure. The chart shows estimates from Nobel Prize-winner Robert Vogel, who predicts that improvements in productivity and lifespan will continue to improve the lives of Americans over the coming decades
Calculating Growth RatesThegrowthrate of aneconomic variable like real GDP orrealGDP per capita is equal to the percentage change from one yearto the next.YearRealGDP$15,471 billion -$15,052 billion2011$15.052billion× 100 = 2.8%$15,052 billion2012$15,471 billionOver periods of a few years, we can average the growth rates tofindtheapproximateannualrateofgrowth.Growth inYearrealGDP20102.5%2.5% + 1.8% + 2.8%2.4%20111.8%320122.8%@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 Calculating Growth Rates The growth rate of an economic variable like real GDP or real GDP per capita is equal to the percentage change from one year to the next. Year Real GDP 2011 $15,052 billion 2012 $15,471 billion $15,471 billion − $15,052 billion $15,052 billion × 100 = 2.8% Over periods of a few years, we can average the growth rates to find the approximate annual rate of growth. Year Growth in real GDP 2010 2.5% 2011 1.8% 2012 2.8% 2.5% + 1.8% + 2.8% 3 = 2.4%
GrowthRatesoverLongerPeriodsFor longer time periods, we wouldn't want to calculate each of theannual growth rates and then take an average in order to find theaverage annual growth rate; instead we would solve for the growthrate g, where:Previous real GDP x (1+g)t = Current real GDPwith t the number of time periods between the previous and currentperiods.A useful shortcut called the Rule of 7o can help us to determine howlong it will take for an economic variable to double:70Numberofyearstodouble=Growth rateSo if the growth rate is 5%, it will take about 14 years for the variableto double.@2015PearsonEducation,Inc.8
© 2015 Pearson Education, Inc. 8 Growth Rates over Longer Periods For longer time periods, we wouldn’t want to calculate each of the annual growth rates and then take an average in order to find the average annual growth rate; instead we would solve for the growth rate g, where: Previous real GDP x (1+g) t = Current real GDP with t the number of time periods between the previous and current periods. A useful shortcut called the Rule of 70 can help us to determine how long it will take for an economic variable to double: Number of years to double = 70 Growth rate So if the growth rate is 5%, it will take about 14 years for the variable to double
What Determines the Rate of Long-Run Growth?Increases inreal GDPpercapitarelyonincreases inlaborproductivity: the quantity of goods and services that can beproduced by one worker or by one hour of work.Why can the average American consume eight times as many goodsand services now, than as in 19oo?Because the average Americanproduces eight times as many goodsand services in an hournow,than as in 19o0.So most of the answer to “what determines the rate of long-rungrowth" is the same as the answer to “what determines laborproductivitygrowth?"@2015PearsonEducation,Inc.C
© 2015 Pearson Education, Inc. 9 What Determines the Rate of Long-Run Growth? Increases in real GDP per capita rely on increases in labor productivity: the quantity of goods and services that can be produced by one worker or by one hour of work. Why can the average American consume eight times as many goods and services now, than as in 1900? Because the average American produces eight times as many goods and services in an hour now, than as in 1900. So most of the answer to “what determines the rate of long-run growth” is the same as the answer to “what determines labor productivity growth?
FactorsAffectingLaborProductivityGrowthIncreasesincapitalperhourworkedCapital is manufactured goods that are used to produce other goodsand services.The more capital a worker has available to use (including humancapital,theaccumulatedknowledgeand skillsworkerspossess),themoreproductiveheorshewillbeTechnological changeImprovements in capital or methods to combine inputs into outputs(i.e. new technologies) allow workers to produce more in a givenperiod of time.The role of entrepreneurs here is critical,inpioneering new ways tobring together the factors of production to produce better or lower-cost products.102015PearsonEducafion,Inc
© 2015 Pearson Education, Inc. 10 Factors Affecting Labor Productivity Growth Increases in capital per hour worked Capital is manufactured goods that are used to produce other goods and services. The more capital a worker has available to use (including human capital, the accumulated knowledge and skills workers possess), the more productive he or she will be. Technological change Improvements in capital or methods to combine inputs into outputs (i.e. new technologies) allow workers to produce more in a given period of time. The role of entrepreneurs here is critical, in pioneering new ways to bring together the factors of production to produce better or lowercost products