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Chapter 26

ECON 295 Chapter 26: Chapter 26.docx

Course Code
ECON 295
Kenneth Ragan

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Chapter 26
I) The Nature of Economic Growth
The three variables in the figure (p638), show different aspects of economic growth, a term
that economists usually reserve for describing sustained or long-run increases in real GDP.
This chapter will discuss real GDP, real per capita GDP (most important) and productivity.
Sustained increases in Y* (potential GDP) are more powerful method of raising material
living standards than the removal of recessionary gaps. Even small differences in annual
growth rates can result in large changes in living standards after many years.
A) Benefits of Economic Growth
Economic growth has two main benefits:
Rising Average Material Living Standards: Economic growth leads to a raise in
average income and thus a change in the consumption pattern.
Alleviation of Poverty: Many of the people who are not part of the labour force do
not share the benefits of economic growth. Because of this, redistribution policies will
be needed if poverty is to be reduced. Thankfully, a rapid growth rate makes the
redistribution easier.
B) Costs of Economic Growth
Economic growth has real costs:
Sacrifice of Current Consumption: growth is often encouraged by increasing
investment and saving which requires less consumption. Economic growth, which
promises more goods and services tomorrow, is achieved by consuming fewer goods
today. This is the opportunity cost of growth.
The Social Costs of Growth: growth usually involves the displacement of some
firms and workers this process involves real transition costs. The process of
economic growth renders some machines obsolete and also leaves the skills of some
workers partly obsolete.
C) Sources of Economic Growth
There are four main sources of economic growth:
Growth of the Labour Force: This may be caused by growth in population
(immigration, sex…) or by increases in of the population that chooses participate in
the labour force.
Growth in Human Capital: Human capital refers to the set of skills that worker have.
This can be increased by education or job training.
Growth in the Physical Capital: The stock of physical capital (factories, machines,
and transportation and communication methods) increases with investment.
Technological Improvement: This I bought by innovation that introduces new
products, new ways of production and new forms of organizing economic activity.
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