Economic Growth and Policies

Bharat D
 Outline
• What is economic growth?
• Why does it matter?
• How do we measure growth?
• Economic growth rate in the U.S.
• Sources of growth
• Reasons for recent slowdown in the U.S. economy
• Policies to foster growth
 Economic Growth

• Increases in standard of living

Why Does Growth Matter?
A Family in the U.K. A Family in Mali

Source: Principles of Macroeconomics, Mankiw

 Measuring Economic Growth

• Changes in production output from one

year to the next

• Market value of all final goods and

services produced within a country
 Nominal GDP vs Real GDP
Year T-shirts Music Books Nominal Real GDP
Downloads GDP
P ($) Q P ($) Q P ($) Q
2012 20 10 1 50 25 6 $400 $400
2013 22 12 0.80 60 26 5 $442 $425

• Nominal GDP in 2012 = P2012 X Q2012

• Real GDP in 2013 = P2012 X Q2013

What Isn’t Measured By
GDP?

Source: Macroeconomics, Acemoglu, Laibson, List

Is GDP a Good Measure of Our
Well-Being?

• Compare people’s happiness to GDP

What is the long-run average growth rate of real GDP in the U.S.?
A. 4%
B. -3%
C. 5%
D. 3%
E. None of the above
 News

Source: https://www.cnbc.com
Economic Growth Over Time and
Around the World
• Economic growth is not inevitable

Source: Principles of Macroeconomics, Hubbard and O’Brien

Economic Growth in the U.S.

Source: Principles of Macroeconomics, Hubbard and O’Brien

 How Large is 1% Growth
Difference?

Source: http://open.lib.umn.edu/macroeconomics/wp-content/uploads/sites/194/2016/11/66b4b6526e7450dbd8cb89e2d7d8820c.jpg
Are Emerging Economies
Catching-up Fast?
Sources of Growth

Source: https://opentextbc.ca/principlesofeconomics/chapter/20-2-labor-productivity-and-economic-growth/
Subcomponent of Growth
in the U.S.

Source: Macroeconomics, Acemoglu, Laibson, List

 Productivity Paradox

• Information revolution

• But GDP growth and productivity did

not tick up
 Is the U.S. running Out of
Breakthrough Innovations?
• Ground breaking innovations like
steam engines, planes, and electricity
are not frequent

• Recent technological improvements

have less impact
 Innovation Takes Time
• Innovation is growing rapidly but taking longer time to
create growth

CREDIT: HYPERLOOP ONE
 Innovation Takes Time
• Burger-flipping robot is on a break already

CREDIT: MISO ROBOTICS
 Policies
• Government plays an important role
• Education subsidies
• R&D subsidies
• Intellectual Property Rights
 Conclusion
• Economic growth improves standard of
living
• Recent U.S. economic slowdown
• Causes of slowdown – No consensus
• Government plays an important role