Topic 8 Economic Growth Part II

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Topic 8 Economic Growth Part II

• Growth of potential GDP drives long run economic
  growth.
• Ways to accelerate growth of potential GDP
• The Convergence Hypothesis

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Actual and Potential GDP in USA
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Actual and Potential GDP in USA
Potential GDP growth rate during post war period
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Actual and Potential GDP in the US

• Data show actual GDP fluctuates up and down
  around potential GDP. Thus, long term economic
  growth rate (_____________________________________
  ________) is roughly the same as the potential
  GDP growth rate.

The average economic growth rate over a long
period

• An objective of macroeconomic policy is to have
  __________________________________.

high potential GDP growth rate
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What do we learn from the experiment?
technology

• The higher the growth rate of ___________,
  _________, ____________, or ________________, the
  higher the growth rate of potential GDP
• Higher ________________ growth is however not
  desirable because the higher it is, the lower the
  growth rate of _____________.

capital
human capital
labor (population)
labor (population)
GDP per capita
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An Empirical Observation
Source Penn World Table 6.1
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An alternative measure of economic growth

• Labor Productivity is the amount of output a
  worker turns out in an hour of work.
• It is a proxy of the economys well being.
• Y/N (L/N) x (Y/L)
• ________________________x_____________
• ____________ Total hours of labor input x
  ___________________
• What are the factors that accelerate growth of
  labor productivity?

GDP per capita
Work length
Labor productivity
Potential GDP
Labor productivity
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Ways to Accelerate Growth of Potential GDP?

• Capital Factors that stimulate investment can
  accelerate growth rate of capital stock.
• A myth before the end of the cold war The leap
  forward strategy of economic development.
• Russia
• China
• India

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Ways to Accelerate Growth Rate of Potential GDP?
education

• Human capital Improving ___________ or
  ___________________can accelerate the growth rate
  of human capital.
• Technology More ____________, _____________,
  ________________, or _______________________
  ____________ accelerates technology progress.
• ______________ creates new technology.
  ________________ absorbs existing technology.
• USA cannot grow as fast as China. Why?

on the job training
education
R D
capital stock
adoption of
available technology
Innovation
Adoption
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Convergence Hypothesis

• Convergence Hypothesis is an empirical phenomena
  that the difference/ratio of GDP per capita
  between rich and poor countries tend to shrink
  over time.
• But many poor countries have not joined the
  convergent club.

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Convergence Hypothesis

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Convergence Hypothesis

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Convergence Hypothesis

• In the future, will many developing countries
  surpass the US GDP per capita?