Reading 14: Economic Growth

LOS a: Calculate how many years it would take for real GDP to double in an advanced economy growing at a real rate 

of 2% as compared to an emerging market economy growing at 7%.

The rule of 70 is a guideline (i.e., a heuristic) that allows one to easily calculate approximately how many years it will 

take GDP (or any value for that matter) to double, given an expected growth rate (or rate of change). 

LOS b: Define the sources of economic growth.

Sources of economic growth (the inputs are factors of production) can be broadly classified as:



Land: all natural resources available for production. 



Capital goods: manufactured goods that are used in production. 



Labor: physical and mental talents of workers that are used in production. 



Entrepreneurial ability: the act of combining the other three factors, making the decisions, and bearing the 

risk, in the hope of generating an economic profit. 

LOS C: Discuss the preconditions for economic growth.



The most important precondition for economic growth is an effective incentive system.  Three institutions 

create incentives:

o

Markets— markets allow buyers and sellers to interact.  Markets allow for saving and investment as 

well as trade and specialization.

o

Property Rights— property rights are the social arrangements that govern the ownership, use, and 

disposal of factors of production and goods and services.

o

Monetary Exchange— facilitates the transfer of property



Growth begins to occur when people begin to specialize in the activities in which they have a comparative 

advantage and trade with each other.

LOS D: Discuss the “One-Third Rule,” and how this rule can be used to explain productivity growth 

slowdown and speedup.



Aggregate Production Function = Y = F(L, K, T)

o

Labor growth depends primarily on population growth.  The growth rate of capital and the pace of 

technological advance determine the growth rate in labor productivity.



Labor productivity is read GDP per hour of labor.



Growth accounting divides the growth in labor productivity into two components and then measures the 

contribution of each:

o

Growth in capital per labor hour— PHYSICAL capital

o

Technological change— everything that accounts to labor productivity growth that is not included in 
growth in capital per labor hour.



The productivity curve is a relationship that shows how real GDP per hour of labor changes as the amount of 

capital per hour of labor changes with a given state of technology.

o

Technological change increases the amount of GDP per hour of labor that can be produced by a 

given amount of capital per hour of labor.

o

Changes in the capital stock (or, the amount of capital per hour of labor) account for movements along 

the productivity curve. Technological change increases the amount of GDP per hour of labor that can be 
produced by a given amount of capital per hour of labor ( a shift in the productivity curve).

o

The productivity curve demonstrates the law of diminishing returns.