CHAPTER 8

Economic Growth

16th Canadian Edition

© 2022 McGraw Hill Ltd.

 LEARNING OBJECTIVES
LO8.1 List two ways that economic growth is measured.
LO8.2 Define modern economic growth and explain the institutional
structures an economy needs in order to experience it.
LO8.3 Identify the general supply, demand, and efficiency forces
that give rise to economic growth.
LO8.4 Describe growth accounting and specific factors accounting
for economic growth in Canada.
LO8.5 Explain why the trend rate of productivity growth in Canada
has increased since 1973.
LO8.6 Discuss differing perspectives on whether growth is desirable
and sustainable.

8.2
8.1 ECONOMIC GROWTH

Economists define and measure economic growth 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 = Real GDP/population

8.3
8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Example
• Real GDP in Canada was $1770.2 billion in 2015 and
$1796.2 billion in 2016.
• Percent change in growth:

8.4
8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Example
• Real GDP in Canada was $1770.2 billion in 2015 and
$1796.2 billion in 2016.
• Percent change in growth:
[(2016 real GDP -2015 real GDP)/2015 GDP] × 100 =

8.5
8.1 ECONOMIC GROWTH

REAL GDP GROWTH

Example
• Real GDP in Canada was $1770.2 billion in 2015 and
$1796.2 billion in 2016.
• Percent change in growth:
[(2016 real GDP -2015 real GDP)/2015 GDP] × 100 =

[($1796.2 billion - $1770.2 billion)/$1770.2 billion] × 100= 1.5%. 8.6

8.1 ECONOMIC GROWTH
REAL GDP PER CAPITA
Real GDP
Real GDP per capita 
Population
• Example

• Real GDP in Canada was $1801.4 billion in 2016 and

 population was 36.3 million.

8.7
8.1 ECONOMIC GROWTH
REAL GDP PER CAPITA
Real GDP
Real GDP per capita 
Population
• Example

• Real GDP in Canada was $1801.4 billion in 2016 and

 population was 36.3 million.
• Real GDP per capita = $49,625.

8.8
8.1 ECONOMIC GROWTH
REAL GDP PER CAPITA
Real GDP
Real GDP per capita 
Population
• Example

• Real GDP in Canada was $1801.4 billion in 2016 and

 population was 36.3 million.
• Real GDP per capita = $49,625.

• In 2017, real GDP per capita rose to $50,556.

8.9
8.1 ECONOMIC GROWTH
REAL GDP PER CAPITA
Real GDP
Real GDP per capita 
Population
• Example

• Real GDP in Canada was $1801.4 billion in 2016 and

population was 36.3 million.

• Real GDP per capita = $49,625.

• In 2017, real GDP per capita rose to $50,556.

• Canada’s rate of growth of real GDP per capita for 2017:

8.10
[($50,556 - $49,625)/$49,625] × 100 = 1.9 percent.
8.1 ECONOMIC GROWTH

GROWTH AS A GOAL
• Growth is a widely held economic goal

• Growth raises standards of living

• Growth lessens the burden of scarcity

8.11
 8.1 ECONOMIC GROWTH

ARITHMETIC OF GROWTH
• Rule of 70
Approximate 70
number of years = annual percentage rate
required to double
of growth
real GDP

• For example, a 5% annual rate of growth will double real GDP in about 14 years (=
8.12

70/5).
 Table 8.1 Real GDP and Per Capita GDP,
1961-2017
(1) (2) (3) (4)
Year GDP (billions Population Per capita GDP (2002 $) (2) / (3)
of 2002 $) (million)
1961 322.7 18.3 17,633
1966 439.1 20.1 21,845
1971 534.0 22.0 24,272
1976 668.9 23.2 28,831
1981 789.8 24.9 31,171
1986 888.9 26.2 33,965
1991 977.3 28.1 34,779
1996 1116.8 29.7 37,602
2001 1348.3 31.1 43,353
2006 1541.6 32.7 47,143
2017 1844.4 36.7 50,256

8.13

Source: Statistics Canada. Canadian Economic Observer: Historical Statistical Supplement.

 8.1 ECONOMIC GROWTH
GROWTH IN CANADA DOES NOT ACCOUNT FOR:

• Improved Products and Services

• Vacuum-tube vs. digital computers

• Added Leisure

• The standard workweek, once 50 hours, is now about 35

hours.

• Other Impacts
8.14

• Environment and quality of life

 8.2 MODERN ECONOMIC GROWTH

• The historically recent phenomenon in which nations have

experienced sustained increases in real GDP per capita.

• Dramatic increases in the standard of living.

• Started with the Industrial Revolution of late 1700s

• Prior to 1700s, GDP per capita was flat over long periods of time.8.15
 8.2 MODERN ECONOMIC
GROWTH
Economic growth has vastly affected cultural, social and
political arrangements:
• Culturally: for the first time in history ordinary people
have significant time for leisure activities and the arts.
• Socially: has allowed for universal public education,
elimination of ancient social norms and legal restrictions
against women and minorities doing certain jobs or
holding certain positions.
• Politically: countries experiencing modern economic 8.16

growth have tended to move toward democracy.

 8.2 MODERN ECONOMIC
GROWTH
THE UNEVEN DISTRIBUTION OF GROWTH
• Modern economic growth has spread slowly from its
British birthplace.

• First advanced to France, Germany, and other parts of

Western Europe in the early 1800s before spreading to
Canada, the United States, and Australia by the late
1800s.
8.17

• Japan began to industrialize in the 1870s.

 8.2 MODERN ECONOMIC
GROWTH
THE UNEVEN DISTRIBUTION OF GROWTH
• Large parts of Central and South America as well as the
Middle East also began to experience economic growth.
• Africa for the most part did not experience sustained
economic growth until the past 20 years.
• Some parts of Asia did not follow until the early to mid-
1900s.
• Some parts of the world have yet to experience economic 8.18

growth at all.
FIGURE 8-1: THE GREAT DIVERGENCE IN LIVING
STANDARDS

8.19
 8.2 MODERN ECONOMIC
GROWTH

CATCHING UP IS POSSIBLE
• Leader countries: As it relates to economic growth,
countries that develop and use advanced technologies,
which then become available to follower countries.

• Follower countries: As it relates to economic growth,

countries that adopt advanced technologies that
previously were developed and used by leader countries. 8.20
 Table 8.2 Real GDP Per Capita in 1960 and 2010 (plus
average annual growth rates of GDP per capita 1960-
2010 for eight selected countries, 2005 dollars)

Real GDP per Real GDP per Average annual growth

Country
capita, 1960 capita, 2007 rate, 1960-2010
United States 14,776 41,365 2.1
Canada 12,901 37,110 2.1
United Kingdom 11,257 34,268 2.2
France 9,347 31,299 2.4
Ireland 6,666 34,877 3.3
Japan 5,472 31,477 3.5
Singapore 4,149 55,862 5.2
Hong Kong 3,849 38,865 4.6
South Korea 1,765 26,609 5.4

Source: Penn World Table version 67.1.

Note: GDP figures for all countries are measured in “international dollars” of equal value to U.S. dollars in 8.21
2005.
 8.2 MODERN ECONOMIC
GROWTH
INSTITUTIONAL STRUCTURES THAT PROMOTE
GROWTH
• Strong Property Rights

• Patents and Copyrights

• Efficient Financial Institutions

• Literacy and Education

• Free Trade

• Competitive Market System 8.22

 8.3 DETERMINANTS OF
GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH
• Supply Factors
1. increases in the quantity and quality natural
resources,

2. increases in the quantity and quality of human

resources,

3. increases in the supply (or stock) of capital goods, and

8.23
4. improvements in technology.
 8.3 DETERMINANTS OF
GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH
• Demand Factor
5. The increase in aggregate demand that brings about
the economic growth made possible by an increase in
the production potential of the economy.

• If that occurs, there will be no unplanned increases in

inventories, and resources will remain fully employed.
8.24
 8.3 DETERMINANTS OF
GROWTH
SIX “INGREDIENTS” OF ECONOMIC GROWTH
Efficiency Factor

6. The capacity of an economy to combine resources

effectively to achieve growth of real output that the
supply factors make possible.

• Least costly way (productive efficiency)

• Maximum well-being (allocative efficiency)

8.25
FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Capital Goods

8.26
B D
Consumer Goods
FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Capital Goods Economic
Growth

8.27
B D
Consumer Goods
FIGURE 8-2: ECONOMIC GROWTH AND THE
PRODUCTION POSSIBILITIES CURVE

A
Capital Goods Economic
Growth

c b
a

8.28
B D
Consumer Goods
 8.3 DETERMINANTS OF
GROWTH
LABOUR AND PRODUCTIVITY
• Decompose real GDP growth
• Real GDP = worker-hours x labour productivity
• % change in GDP = % change in worker-hours + % change in
productivity.
• Labour productivity
• the average product of labour.
• output per worker per hour.
• Labour force participation rate
• The percentage of the working age population that is actually in the 8.29
labour force.
FIGURE 8-3: THE SUPPLY DETERMINANTS OF
REAL OUTPUT

• Size of employed
labour force
• Average hours of
work

• Technological
advance
• Quantity of capital
• Education and
training
• Allocative
efficiency
• Other
8.30
FIGURE 8-3: THE SUPPLY DETERMINANTS OF
REAL OUTPUT

• Size of employed
labour force Labour
Inputs
• Average hours of (hours of
work work)

• Technological
advance
• Quantity of capital
• Education and
training
• Allocative
efficiency
• Other
8.31
FIGURE 8-3: THE SUPPLY DETERMINANTS OF
REAL OUTPUT

• Size of employed
labour force Labour
Inputs
• Average hours of (hours of
work work)

• Technological
advance
• Quantity of capital Labour
Productivity
• Education and (average
training output per
• Allocative hour)
efficiency
• Other
8.32
FIGURE 8-3: THE SUPPLY DETERMINANTS OF
REAL OUTPUT

• Size of employed
labour force Labour
Inputs
• Average hours of (hours of
work work)

• Technological
×
advance
• Quantity of capital Labour
Productivity
• Education and (average
training output per
• Allocative hour)
efficiency
• Other
8.33
FIGURE 8-3: THE SUPPLY DETERMINANTS OF
REAL OUTPUT

• Size of employed
labour force Labour
Inputs
• Average hours of (hours of
work work)

• Technological
× Real
=
advance GDP
• Quantity of capital Labour
Productivity
• Education and (average
training output per
• Allocative hour)
efficiency
• Other
8.34
 8.4 ACCOUNTING FOR GROWTH
IN CANADA

• Output growth in Canada has been considerably greater in the last

half century than can be attributed solely to increases in the inputs of
labour and capital.
• Two other factors are involved:
1. Interindustry shifts from lower- to higher-productivity occupations.
2. Multifactor productivity (MFP) growth
• efficiency with which factors are used together in the production process
8.35
 Table 8.3 Annual Average Growth Rates of
Productivity in Canada, 1946-2015*

Years Output Employment Hours worked Output per Output per

worker hour

1946-2015 3.6 1.6 1.2 1.9 2.3

1946-1973 5.0 1.6 0.9 3.3 4.0
1973-1981 3.5 2.7 2.0 0.8 1.4
1981-1989 3.1 1.8 1.8 1.2 1.3
1989-2000 2.9 1.4 1.2 1.6 1.7
2000-2015 1.8 1.2 0.9 0.6 0.9

*The business sector

Source: Centre for the Study of Living Standards.

8.36
 8.4 ACCOUNTING FOR GROWTH
IN CANADA
REASONS FOR GROWTH
• Inputs versus productivity

• Quantity of labour

• Technological advances (largest)

• Quantity of capital (e.g. public investment in

infrastructure)
8.37
• Education and training (human capital)
 8.4 ACCOUNTING FOR GROWTH
IN CANADA

ECONOMIES OF SCALE AND RESOURCE ALLOCATION

• ECONOMIES OF SCALE: Reductions in the average total cost

of producing a product as the firm expands the size of plant
(its output) in the long run

• IMPROVED RESOURCE ALLOCATION: workers have moved

over time from low-productivity employment to high-
productivity employment 8.38
 8.5 RECENT FLUCTUATIONS IN THE
AVERAGE RATE OF PRODUCTIVITY
GROWTH
REASONS FOR THE RISE IN THE AVERAGE RATE OF
PRODUCTIVITY GROWTH BETWEEN 1995 AND 2010

1. The microchip and information technology

2. New firms and increasing returns:
• More Specialized Inputs
• Spreading of Development Costs
• Simultaneous Consumption
• Network Effects
• Learning-by-Doing
8.39
3. Global competition
 8.1 GLOBAL PERSPECTIVE
GLOBAL COMPETITIVENESS INDEX
The World Economic Forum annually compiles a global competitiveness index,
which uses various factors (such as innovativeness, effective transfer of
technology among sectors, efficiency of the financial system, rates of investment,
and degree of integration with the rest of the world) to measure the ability of a
country to achieve economic growth over time. Here is its latest top ten list for
2016-2017, plus Canada, which ranks 15th.
Country Global competitiveness ranking, 2016-2017

Switzerland 1
Singapore 2
United States 3
Netherlands 4
Germany 5
Sweden 6
United Kingdom 7
Japan 8
Hong Kong 9
Finland 10
Canada 15 8.40
 8.5 RECENT FLUCTUATIONS IN THE
AVERAGE RATE OF PRODUCTIVITY
GROWTH

IMPLICATIONS OF ECONOMIC GROWTH

• Stronger productivity growth

• Heightened global competition

• Both allow the economy to achieve a higher rate of economic
growth.
8.41
• Recall Figure 8.2
 8.6 IS ECONOMIC GROWTH
DESIRABLE AND SUSTAINABLE?

THE ANTI-GROWTH VIEW

• Industrialization and growth result in pollution, global
warming, and other environmental problems.
• No evidence that economic growth has solved
sociological problems such as poverty, homelessness,
and discrimination.
• Growth permits us to “make a better living,” it does
not give us “the good life”.
• High growth rates are not sustainable. 8.42
 8.6 IS ECONOMIC GROWTH
DESIRABLE AND SUSTAINABLE?
IN DEFENCE OF GROWTH
• The path to the greater material abundance and higher
living standards is desired by the majority of people.
• Economic growth has not made labour more unpleasant
or hazardous.
• Growth has allowed economies to reduce pollution, and
be more sensitive to environmental considerations.
• Growth is sustainable because it has more to do with the
expansion and application of human knowledge and
8.43
information than extractable natural resources.
 The LAST WORD Can Economic Growth Survive Population Decline?

The Demographic Transition Is Causing Greying Populations, Shrinking

Labour Forces, and Overall Population Decreases in Many Nations.
Can Economic Growth Survive?

• Real GDP = hours of work x labour productivity

• Hours of work depend on the size of the working-age population.
• If working-age population falls, hours of work falls.
• Labour productivity must increase faster than hours of work decreases for
real GDP to rise.
• Total fertility rate is below the replacement level for many nations.
• In Canada, the inverse dependency ratio is set to fall from 1.5 in 2010 to
1.16 in 2050.
8.44
• Economists are uncertain if the increase in productivity is sufficiently large
to keep standards of living from falling.
 CHAPTER SUMMARY
LO8.1 List two ways that economic growth is measured.
LO8.2 Define modern economic growth and explain the
institutional structures needed for an economy to
experience it.
LO8.3 Identify the general supply, demand, and efficiency
forces that give rise to economic growth.
LO8.4 Describe growth accounting and specific factors
accounting for economic growth in Canada.
LO8.5 Explain the recent trend toward productivity
acceleration.
LO8.6 Discuss differing perspectives as to whether growth is
desirable and sustainable.
8.45