10.1 The Nature of Economic Growth

Question 1

What are the three aspects of Economic Growth?

Answer 1

• Real GDP
• Real Per Capita GDP
• Real GDP per worker

Question 2

What does real GDP NOT tell us about?

Answer 2

Though real GDP is an accepted measure of the amount of annual economic activity that passes through markets, it does not tell us about changes in average material living standards because it does not take into account the growth in the population—more national income is not necessarily better if more people have to share it.

Question 3

What has been the overall direction of the three factors of economic growth over the past half-century?

Answer 3

Real GDP, real per capita GDP, and labour productivity have all grown substantially over the past half-century.

Question 4

What have certain factors of economic growth grown faster than others over the last half-century?

Answer 4

Real GDP has grown faster than real per capita GDP because the population has grown. Real per capita GDP has grown faster than real GDP per worker (labour productivity) because the level of employment has grown faster than the population.

Question 5

What is one of the ost im0portant reasons that per capita GDP increses over many years?

Answer 5

As we will see in this chapter, one of the most important reasons that per capita GDP increases over many years is growth in productivity.

Question 6

How much more productive are Canadian works now than they were in 1961?

Answer 6

Its overall growth from 1961 to 2020 is 98 percent, an average annual growth rate of 1.2 percent; the average Canadian worker in 2020 produced almost double the amount of output produced by the average worker in 1961.

Question 7

How does labour productivity grow over time?

Answer 7

Any new production process or technique that raises output proportionally more than it raises labour input will increase labour productivity.

Often the introduction of new physical capital or new techniques allow firms to increase output while reducing their use of labour. In this case, labour productivity for the firm might increase significantly.

Question 8

How do we get from these specific micro examples back to macroeconomics and the change in real GDP and aggregate labour productivity?

Answer 8

If in each example the amount of work is unchanged but output rises, real GDP and aggregate labour productivity will both be higher as a result.

If instead each specific output is unchanged but the amount of work is reduced, then we need to recognize that the workers released from these activities are now available to move to other firms and industries.

When they begin working elsewhere in the economy, their new production will constitute an increase in real GDP. In this case, total work effort will be back to its original level but real GDP will be higher—an increase in aggregate labour productivity.

Question 9

Definition of Economic growth

Answer 9

Sustained, long-run increases in the level of real GDP or real per capita GDP.

Question 10

How do small differences in income growth rates affect levels of income over a few decades?

Answer 10

Small differences in income growth rates make enormous differences in levels of income over a few decades.

Question 11

What is the rule of 72?

Answer 11

It is useful to know the “rule of 72” to understand the cumulative effects of annual growth rates. For any variable that grows at an annual rate of X percent, that variable will double in approximately 72/X years.

Question 12

What is another application of the rule of 72?

Answer 12

Another application of the rule of 72 is to determine the gap in living standards between countries with different growth rates. If one country grows faster than another, the gap in their respective living standards will widen progressively. If, for example, Canada and France start from the same level of income but Canada grows at 3 percent per year while France grows at 2 percent per year, Canada’s income will be twice France’s in 72 years.

Question 13

What is the central lession we should derive about small differences in annual growth rates?

Answer 13

The longer your time horizon, the more you should care about the economy’s long-run growth rate. Small differences in annual growth rates, if sustained for many years, lead to large differences in income levels.

Question 14

How do economists typically measure average living standards?

Answer 14

Economists typically measure average material living standards with real per capita GDP.

Question 15

What is important to distinguish between when thinking about average licing standards and economic growth?

Answer 15

But it is important to distinguish between the increases in average living standards that economic growth brings more or less automatically and the reduction in poverty that economic growth makes possible but that may still require active policy to make a reality.

Question 16

What is a common effect of an increase in income on homes?

Answer 16

A family often finds that an increase in its income can lead to changes in the pattern of its consumption—extra income buys important amenities of life and also allows more saving for the future.

Question 17

How does economic growth that riases average income tend to change society’s consumption patterns?

Answer 17

Similarly, economic growth that raises average income tends to change the whole society’s consumption patterns, shifting away from tangible goods such as TVs and furniture and cars and toward services such as vacations, restaurant meals, and financial services.

Question 18

What percent of aggergate consumption do services account for in rich countries?

Answer 18

In Canada and other rich, developed countries, services account for roughly 70 percent of aggregate consumption, whereas this ratio is significantly lower in poorer, developing countries.

Question 19

Another example of how economic growth can improve living standards involves environmental protection. How?

Answer 19

Richer countries have the luxury of not having to worry about immediate basic needs such as hunger, so we are able to conecntrate more on enviromental concerns.

Question 20

Where does the majority of aggregate income growth accrue?

Answer 20

In recent years, growing attention has been paid to the fact that the majority of aggregate income growth in many countries, including Canada, has been accruing to the top earners in the income distribution. The result is that, while average per capita incomes have been rising (as shown in Figure 10-1), there has also been a rise in income inequality and a relative stagnation of incomes for those at or below the middle of the income distribution. Both poverty and income inequality are important challenges for public policy.

Question 21

How can rapid overall growth rate make the alleviation of poverty and reduction of income equality easier to achieve politically?

Answer 21

A rapid overall growth rate makes the alleviation of poverty and the reduction of income inequality easier to achieve politically. If existing income is to be redistributed through the government’s tax or spending policies, someone’s standard of living will actually have to be lowered.

Question 22

What do those against continued economic growth argue on the grounds of?

Answer 22

Indeed, many of those who advocate against continued economic growth do so on the grounds that it depletes our natural resources and leads to excessive environmental degradation.

Question 23

What is the cost of growth?

Answer 23

Economic growth, which promises more goods and services in the future, is achieved by consuming fewer goods today. This sacrifice of current consumption is an important cost of growth.

Question 24

What is a social cost of economic growth?

Answer 24

The process of economic growth is disruptive for some businesses and workers. There are social costs from workers’ skills becoming obsolete.

Question 25

What does a high growth rate require from the labour force?

Answer 25

A high growth rate usually requires rapid adjustments in the labour force, which can cause much upset and misery to some of the people affected by it.

Question 26

What are the four sources of economic growth?

Answer 26

• Growth in the labour force.
• Growth in human capital
• Growth in physical capital.
• Technological improvement.

Question 27

Describe Growth in the labour force.

Answer 27

Growth in population or increases in the fraction of the population that chooses to participate in the labour force cause the labour force to grow.

Question 28

Describe growth in human capital.

Answer 28

Human capital is the term economists use to refer to the set of skills that workers have; it can increase either through formal education or on-the-job training. Human capital can be thought of as the quality of the labour force.

Question 29

Describe growth of physical capital

Answer 29

The stock of physical capital (such as factories, machines, electronic equipment, and transportation and communications facilities) grows only through the process of investment. We include here improvements in the quality of physical capital.

Question 30

Describe technological improvement.

Answer 30

This is brought about by innovation that introduces new products, new ways of producing existing products, and new forms of organizing economic activity.