Chapter 8: Economic Growth

Start Up: How Important Is Economic Growth?

How important is economic growth? The best way to answer that question is to imagine life without growth—to imagine that we did not have the gains growth brings.

For starters, divide your family’s current income by six and imagine what your life would be like. Think about the kind of housing your family could afford, the size of your entertainment budget, whether you could still attend school. That will give you an idea of life a century ago in the United States, when average household incomes, adjusted for inflation, were about one-sixth what they are today. People had far smaller homes, they rarely had electricity in their homes, and only a tiny percentage of the population could even consider a college education.

To get a more recent perspective, consider how growth has changed living standards over the past half century or so. In 1950, the United States was the world’s richest nation. But if households were rich then, subsequent economic growth has made them far richer. Average per capita real income has tripled since then. Indeed, the average household income in 1950, which must have seemed lofty then, was below what we now define as the poverty line for a household of four, even after adjusting for inflation. Economic growth during the last 60-plus years has dramatically boosted our standard of living—and our standard of what it takes to get by.

One gauge of rising living standards is housing. A half century ago, most families did not own homes. Today, about two-thirds do. Those homes have gotten a lot bigger: new homes built today are more than twice the size of new homes built 50 years ago. Some household appliances, such as telephones or washing machines, that we now consider basic, were luxuries a half century ago. In 1950, less than two-thirds of housing units had complete plumbing facilities. Today, over 99% do.

Economic growth has brought gains in other areas as well. For one thing, we are able to afford more schooling. In 1950, the median number of years of school completed by adults age 25 or over was 6.8. Today, about 87% have completed 12 years of schooling and about 30% have completed 4 years of college. We also live longer. A baby born in 1950 had a life expectancy of 68 years. A baby born in 2008 had an expected life of nearly 10 years longer.

Of course, while economic growth can improve our material well-being, it is no panacea. Americans today worry about the level of violence in society, environmental degradation, and what seems to be a loss of basic values. But while it is easy to be dismayed about many challenges of modern life, we can surely be grateful for our material wealth. Our affluence gives us the opportunity to grapple with some of our most difficult problems and to enjoy a range of choices that people only a few decades ago could not have imagined.

We learned a great deal about economic growth in the context of the production possibilities curve. Our purpose in this chapter is to relate the concept of economic growth to the model of aggregate demand and aggregate supply that we developed in the previous chapter and will use throughout our exploration of macroeconomics. We will review the forces that determine a nation’s economic growth rate and examine the prospects for growth in the future. We begin by looking at the significance of growth to the overall well-being of society.