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The Basics of Economic Growth The standard of living depends on real GDP per person. Real GDP per person is real GDP divided by the population. Real GDP per person grows only if real GDP grows faster than the population grows. ? Pearson Education 2012 Economic Growth Trends Real GDP Growth in the World Economy Figure 15.3(a) shows the growth in the rich countries. Japan grew rapidly in the 1960s, slower in the 1980s, and even slower in the 1990s. Growth in Canada and the US have been similar to that in Europe Big 4. ? Pearson Education 2012 ? Pearson Education 2012 Economic Growth Trends Figure 15.3(b) shows the growth of real GDP per person in group of poor countries. The gaps between real GDP per person in the US and in these countries have widened. ? Pearson Education 2012 ? Pearson Education 2012 Why Real GDP Grows What makes real GDP grow? The answer is labour productivity growth. Labour productivity is the quantity of real GDP produced by an hour of labour. Labour productivity must grow if real GDP per person is to grow. So what makes labour productivity grow? ? Pearson Education 2012 Why Real GDP Grows Labour Productivity Growth The fundamental precondition for labour productivity growth is the incentive system created by firms, markets, property rights and money. The growth of labour productivity depends on: Physical capital growth Human capital growth Technological advances ? Pearson Education 2012 Why Real GDP Grows Physical Capital Growth Physical capital growth results from saving and investment decisions. The accumulation of new capital increased capital per worker and increased labour productivity. Human Capital Growth Human capital acquired through education, on-the-job training, and learning-by-doing is the most fundamental source of economic growth. Human capital growth is the source of increased labour productivity and technological advance. ? Pearson Education 2012 Why Real GDP Grows Technological Advances Technological chang