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Chapter 8

Economic Growth can be defined and measured as either:

- an increase in real GDP occurring over some time period;
- an increase in real GDP per capita occurring over some time period

Real GDP per capita a (or per capita output) is

the amount of real output per person in the country

Real GDP per capita =

Real GDP/Population

The Growth of real GDP is more useful

for measuring expansion of military potential preeminence

Unless specified otherwise, growth rates reported in the news and by international agencies use

the definition of economic growth

Real GDP per capita

is ore useful for comparing living standarts

Economic growth is a widely held goal because

it results in rising real wages and incomes and thus higher standards of living

Our current era of Modern Economic Growth is characterized by

sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime.

Modern economic growth has spread slowly from

its British birthplace (1776 - invention of steam engine)

What is the main cause of the vast differences in per capita GDP levels that we see today?

The different starting dates for modern economic growth in various parts of the world

For example, modern economic growth has occurred for nearly 200 years in the U.S. but only a few decades in Africa

As a result, average living standards at present are 20 times higher in the United States than in Africa

What is the average growth rate of Leader (richer) countries?

2-3 percent

Why is hard to for leader countries to grow rapidly?

Due to the fact that inventing and implementing new technology is costly and slow (hard to grow rapidly)

Why Follower countries (poorer countries) can grow much faster?

They simply adopt existing technology from rich countries (they can skip many technological and developmental steps)

Large differences in living standards even between rich countries can be caused by

differences in Labor Supply

How many percent the United States real GDP per capita is higher than France?

40 percent

Why the US real GDP per capita is higher than in many other leader countrie?

U.S. citizens put in substantially more labor time (more hours worked) than do the citizens of other leader countries (less leisure time for U.S. citizens

What is the labor force participation rate?

Labor force participation rate is the percentage of working-age population actually in the labor force

Institutional Structures that Promote Growth:

- Strong property rights;
- Patents and copyrights;
- Efficient financial institutions;
- Literacy and Widespread Education;
- Free Trade;
- A competitive market system;
- Social-cultural-political environment.

Strong property rights

- is necessary for rapid and sustained economic growth;
- People will not invest if they believe thieves or the government will steal their investments or returns

Patents and copyrights

- Necessary if society wants a constant flow of innovative new technologies and ideas
- Financial incentive for inventions

Efficient financial institutions

Required to channel the savings generated by households to businesses and entrepreneurs

Literacy and Widespread Education

-Without highly educated inventors, new technology is not invented
-Without highly educated work-force, impossible to implement new technologies and put them to productive use

Free Trade

Allows countries to specialize in items in which they have a comparative advantage - this encourages efficient use of resources and increases consumption

A competitive market system

- Prices and profits serve as signals to tell firms what to make and how much of it to make
- Firms have substantial autonomy to follow these market signals in leader countries

Social-cultural-political environment

- U.S. has had stable political system that encourages economic and political freedom
- Encourages production and material progress
- Positive attitude towards risk-taking and work

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