Economic Growth. Growth and the business cycle Short-run economic growth and the business cycle.

Economic Growth

Economic Growth

Growth and the business cycleGrowth and the business cycle

Short-run economic growth and the business cycle

Short-run economic growth and the business cycle


Actual and potential economic growth

Actual and potential economic growth

v

x

y

O

Growth through making a fuller use of resourcesGrowth through making a fuller use of resourcesF

oo

d

Clothing

Production insidethe production

possibility curve

O

Growth in potential outputGrowth in potential outputF

oo

d

Clothing

Now

O

Fo

od

Clothing

Now

Growth in potential outputGrowth in potential output

5 years’ time

O

Fo

od

Clothing

Growth in potential and actual outputGrowth in potential and actual output

O

Fo

od

Clothing

Growth in potential and actual outputGrowth in potential and actual output

x

y


The business cycleThe business cycle

O

Nat

iona

l out

put

Time

Potential output

1

2

3

4

1

2

34Actualoutput


O

Nat

iona

l out

put

Time

Potential output

Actualoutput

Trendoutput



The business cyclein practice

The business cyclein practice

Ann

ual g

row

th r

ate

(%)

UK

Growth rates in selected industrial countriesGrowth rates in selected industrial countries

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

France


-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

France

Germany


Ann

ual g

row

th r

ate

(%)

UK

France USA

Germany

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


Ann

ual g

row

th r

ate

(%)

UK

France USA

GermanyJapan

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


Long-term economic growthLong-term economic growth

Long-term economic growth

Long-term economic growth


UK economic growth over the decades

UK economic growth over the decades

30

40

50

60

70

80

90

100

110

120

1950 1960 1970 1980 1990 2000

Re

al

GD

P (

19

95

= 1

00

)UK GDP at market prices (1995=100)UK GDP at market prices (1995=100)

Average annual percentage growth rateAverage annual percentage growth ratein GDP per person employedin GDP per person employed

Output per person employed in 2000relative to that in 1961

Output per person employed in 2000relative to that in 1961

0102030405060708090UKFranceEastWest

Productivity in selected countries, 1999 (UK = 100)Productivity in selected countries, 1999 (UK = 100)


A simple model of economic growthA simple model of economic growth

Economic growthEconomic growth

Long-term growth:to steady-state

income

Long-term growth:to steady-state

income

K0

Depreciation (D)

Investment (I)

Steady-state outputSteady-state output

Capital stock (K)

Ou

tpu

t (Y

), In

vest

me

nt (I)

, Dep

reci

atio

n (D

)

K1

Y1

Output (Y)

g

Y0

bI0D0

O

c

f

a


Long-term growth:an increase inthe saving rate

Long-term growth:an increase inthe saving rate

Capital stock (K)

K1 K2

Y2

Y1

Y

D

I2

I1g

m

nh

Ou

tpu

t (Y

), In

vest

me

nt (I)

, Dep

reci

atio

n (D

)

f

Effect of an increase in the rate of saving and investmentEffect of an increase in the rate of saving and investment

Saving rate (%)

Co

nsu

mp

tion

O 100

a b

An optimum saving rateAn optimum saving rate

Saving rate (%)

Co

nsu

mp

tion

C*

s*O 100

a

m

b

An optimum saving rateAn optimum saving rate


Long-term growth:technological

progress

Long-term growth:technological

progress

Capital stock (K)

K1 K2

Y2

Y2

D

I2

I1g

p

nh

Ou

tpu

t (Y

), In

vest

me

nt (I)

, Dep

reci

atio

n (D

)Effect of embodied technological progressEffect of embodied technological progress

Y1

Y1

f

Effect of technological progress on growth ratesEffect of technological progress on growth rates

Lower rateof technological

progress

Higher rateof technological

progress

Time

Out

put

Effect of an increase in the saving rate,with a given rate of technological progress


Time

Ou

tpu

t

Steady-stategrowth path 1

Actualgrowth path

Slope determinedby rate of

technological progress




Time

Ou

tpu

t

t1


Rate of savingincreasesat time t1

Actualgrowth path

Economic Growth. Growth and the business cycle Short-run economic growth and the business cycle.

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Transcript of Economic Growth. Growth and the business cycle Short-run economic growth and the business cycle.