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CHAPTER 8
PRODUCTIVITY AND GROWTH
In this chapter, you will find:
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Answers to the End-of-Book Questions and Problems for Chapter 8
Supplemental Cases, Exercises, and Problems
INTRODUCTION
This chapter introduces productivity and growth as keys to economic prosperity, using the per-worker
production function as a framework. The productivity across nations is examined and the U.S. growth
record, particularly since World War II, is considered in detail. Given the importance of productivity
growth in determining a nation’s standard of living, this is an especially interesting and relevant chapter.
LEARNING OUTCOMES
1
Explain the theory of productivity and growth
If the population is continually increasing, an economy must produce more goods and services simply to
maintain its standard of living, as measured by output per capita. If output grows faster than the population, the
standard of living rises.
The per-worker production function shows the relationship between the amount of capital per worker in
the economy and the output per worker. As capital per worker increases, so does output per worker but at a
decreasing rate. Technological change and improvements in the rules of the game shift the per-worker
production function upward, so more is produced for each ratio of capital per worker.
2
Describe productivity and growth in practice
Since 1870, U.S. labor productivity growth has averaged 2.2 percent per year. The quality of labor and capital is
much more important than the quantity of these resources. Labor productivity growth slowed between 1974 and
1982, in part because of spikes in energy prices and implementation of costly regulations necessary to protect
the environment and improve workplace safety. Since 1983 productivity growth has picked up, especially since
1996, due primarily to information technology. Among the seven major industrial market economies, the United
States has experienced the third highest growth rate in real GDP per capita over the last thirty years and most
recently experienced the highest real GDP per capita.
3
Discuss other issues of technology and growth
Technological change sometimes costs jobs in the short run when workers fail to adjust. Over time, however,
most displaced workers find other jobs, sometimes in new industries created by technological change. There is
no evidence that, in the long run, technological change increases unemployment in the economy.
Some governments use industrial policy in an effort to nurture the industries and technologies of the
future, giving domestic industries an advantage over foreign competitors. But critics are wary of the
government’s ability to pick the winning technologies of the future.
Convergence is a theory predicting that the standard of living around the world will grow more alike, as
poorer countries catch up with richer ones. Some Asian countries that had been poor are catching up with the
leaders, but many poor countries around the world have failed to close the gap.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8
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110
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-6 FOR THE FOLLOWING SECTION
Theory of Productivity and Growth
Growth and the Production Possibilities Frontier
 Outward shift in the PPF caused by:
 greater availability of resources
 improvement in the quality of resources
 technological changes that make better use of resources
 improvements in the “rules of the game” that enhance production
USE POWERPOINT SLIDES 7-9 FOR THE FOLLOWING SECTION
What Is Productivity? Ratio of total output to a specific measure of input.
Labor Productivity: Output per unit of labor, measured as real GDP divided by the hours of labor used to
produce the output
USE POWERPOINT SLIDES 10-14 FOR THE FOLLOWING SECTION
Per-Worker Production Function
 Relationship between the amount of capital per worker and the output per worker.
 Slope of the curve (per-worker production function): Positive because an increase in capital per
worker helps each worker produce more output. The diminishing slope reflects the law of
diminishing marginal returns from capital: As the quantity of capital increases, the output per worker
increases at a diminishing rate.
 Capital deepening is an increase in the quantity of capital per worker.
Technological Change: Usually improves the quality of capital. As technological breakthroughs become
embodied in new capital, resources are combined more efficiently, increasing total output.
Rules of the Game: the formal and informal institutions that promote economic activity.
USE POWERPOINT SLIDES 15-17 FOR THE FOLLOWING SECTION
Productivity and Growth in Practice
 The U.S. produces about 150 times the per capita output of the world’s poorest countries
 Industrial market countries (economically advanced capitalist countries) versus developing countries
(lower standard of living due to less human and physical capital)
USE POWERPOINT SLIDES 18-23 FOR THE FOLLOWING SECTION
Education and Economic Development
U.S. Labor Productivity
 Small differences in productivity can make huge differences in the economy’s ability to produce and,
therefore, on the standard of living.
Slowdown and Rebound in Productivity Growth
Productivity growth in the U.S. rebounded from 1974-1982 and from 1983-1995 averaged 1.8%. From
1996 to 2010, productivity growth averaged 2.7%. The growth during this time is partly attributed to the
information revolution powered by the computer chip.
USE POWERPOINT SLIDES 24-25 FOR THE FOLLOWING SECTION
Output per Capita: real GDP divided by population indicates how much an economy produces on
average per resident.
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Chapter 8
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Output per capita increases if:
1) Labor productivity increases for a given worker-population ratio
2) Worker-population ratio increases for a given labor productivity
3) Both worker-population ratio and labor productivity increase
USE POWERPOINT SLIDES 26-28 FOR THE FOLLOWING SECTION
International Comparisons
 U.S. is at the top of other countries, with a per capita income 20% above second-ranked Canada.
 Among the seven major industrial market economies, the United States has experienced the third
highest growth rate in real GDP per capita over the last thirty years.
USE POWERPOINT SLIDE 29 FOR THE FOLLOWING SECTION
Does Technological Change Lead to Unemployment?
 Some fear that if technological change reduces the labor needed to produce a given amount of output,
it can lead to unemployment in some industries.
 But technological change can make products more affordable.
 Change may displace workers in short run, but long-term benefits include higher real incomes and
more leisure.
USE POWERPOINT SLIDES 30-31 FOR THE FOLLOWING SECTION
Research and Development
Improvements in technology arise from scientific discovery.
 Basic Research: The search for knowledge without regard to how that knowledge will be used.
 Applied Research: Seeks to answer particular questions or apply scientific discoveries to the
development of specific products.
 Expenditures for Research and Development: R&D spending as a percentage of GDP
USE POWERPOINT SLIDE 32 FOR THE FOLLOWING SECTION
Industrial Policy: The idea that government, using taxes, subsidies, regulations, and coordination of the
private sector, can help nurture industries and technologies of the future to give domestic industries an
advantage over foreign competitors..
USE POWERPOINT SLIDES 33-35 FOR THE FOLLOWING SECTION
Do Economies Converge?
 Convergence theory: Developing countries can grow faster than advanced ones and should
eventually close the gap.
– Leading countries such as the United States find growth limited by the rate of creation of new
knowledge and better technology, but follower countries can grow more quickly by closing the
technological gap.
 Convergence may not occur because of:
– In the poorest economies, birth rates are double those in wealthier countries.
– Vast differences in the quality of human capital across countries.
– Lack of a stable macroeconomic environment and established institutions to nurture economic
growth.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8
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112
CHAPTER SUMMARY
If the population is continually increasing, an economy must produce more goods and services simply to
maintain its standard of living, as measured by output per capita. If output grows faster than the
population, the standard of living rises.
An economy’s standard of living grows over the long run because of (a) increases in the amount and
quality of resources, especially labor and capital, (b) better technology, and (c) improvements in the rules
of the game that facilitate production and exchange, such as tax laws, property rights, patent laws, the
legal system, and customs of the market.
The per-worker production function shows the relationship between the amount of capital per worker in
the economy and the output per worker. As capital per worker increases, so does output per worker, but at
a decreasing rate. Technological change and improvements in the rules of the game shift the per-worker
production function upward, so more is produced for each ratio of capital per worker.
Since 1870, U.S. labor productivity growth has averaged 2.2 percent per year. The quality of labor and
capital is much more important than the quantity of these resources. Labor productivity growth slowed
between 1974 and 1982, in part because of spikes in energy prices and implementation of costly
regulations necessary to protect the environment and improve workplace safety. Since 1983 productivity
growth has picked up, especially since 1996, due primarily to information technology.
Among the seven major industrial market economies, the United States has experienced the third highest
growth rate in real GDP per capita over the last thirty years and most recently experienced the highest real
GDP per capita.
Technological change sometimes costs jobs and imposes hardships in the short run, as workers scramble to
adjust to a changing world. Over time, however, most displaced workers find other jobs, sometimes in new
industries created by technological change. There is no evidence that, in the long run, technological
change increases unemployment in the economy.
Some governments use industrial policy in an effort to nurture the industries and technologies of the
future, giving domestic industries an advantage over foreign competitors. But critics are wary of the
government’s ability to pick the winning technologies of the future.
Convergence is a theory predicting that the standard of living around the world will grow more alike as
poorer countries catch up with richer ones. Some Asian countries that had been poor are catching up with
the leaders, but many poor countries around the world have failed to close the gap.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8
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113
TEACHING POINTS
1. This chapter shifts from short-run stabilization concerns to the long-run goals and performance of
the economy. Central to the notion of successful growth is the idea of investment in capital,
education, and research and development. The chapter considers at length the determinants of
labor productivity as well as overall economic growth. Each of these is tied to thrift and investment
of some sort.
2. Some students may be accustomed to thinking that technology replaces labor in the production
process. You should emphasize two important considerations. First, not all technology acts as a
substitute for labor; some requires additional labor for operation and maintenance but still
produces more output per worker. Second, if some technology does replace labor, this labor will
find an outlet producing other products, thus increasing the national output. In the long run,
technological change makes labor more productive and consequently increases living standards.
3. It is probably important to mention that a better-educated (more highly skilled) labor force also
requires thrift on the part of society. Society must divert current resources to build educational
facilities and research centers. On the individual level, each person must sacrifice leisure to obtain
the desired skills or education.
4. Students should be led through the discussion of the per-worker production function. The effects
on output per capita of both changes in the size of the labor force and the growth rate of
productivity should be discussed. If employment grows faster than the population as a whole,
output per capita can increase faster than productivity per worker. With a higher percentage of the
population working, output per capita can grow faster than output per worker.
5. In discussing the theory of convergence, it is important to emphasize the factors that may keep an
economy from converging with an industrial economy. Those factors are (1) an increase in birth
rates, (2) differences in quality of human capital, and (3) lack of a stable macroeconomic
environment.
ANSWERS TO END-OF-BOOK QUESTIONS AND PROBLEMS
1.1
(Growth and the PPF) Use the production possibilities frontier (PPF) to demonstrate economic
growth.
a. With consumption goods on one axis and capital goods on the other, show how the
combination of goods selected this period affects the PPF in the next period.
b. Extend this comparison by choosing a different point on this period’s PPF and determining
whether that combination leads to more or less growth over the next period.
a. An economy that produces more capital goods than consumer goods (point A on Graph A
below) will grow more in the future as reflected by the shifting out of the production
possibilities frontier from CI to CI.
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Chapter 8
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b. If a point (B in Graph B) had been chosen, which produced more consumption goods and
thus less capital goods than point A in Graph A, this country would not have experienced as
much future growth. The production possibilities curve would only have shifted out a little, to
C"I".
1.2
(Shifts in the PPF) Terrorist attacks foster instability and may affect productivity over the short and
long term. Do you think the September 11, 2001, terrorist attacks on the World Trade Center and
the Pentagon affected short- and/or long-term productivity in the United States? Explain your
response and show any movements in the PPF.
The attacks affected short-term productivity because production capabilities for some sectors,
especially financial services in the New York area, were negatively impacted by personnel killed
and injured, resources destroyed, and the time spent repairing facilities and relocating. Longterm productivity may have been affected if businesses chose to set up elsewhere or found
production required more resources than in the past. Reactions to the disaster have led to
technological and other changes which ultimately enhance production capabilities.
Any loss of productivity shifts the curve inward (or leftward) while improvements lead to a
rightward shift.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8
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2.1 (Long-Term Productivity Growth) Suppose that two nations start out in 2012 with identical levels of
output per work hour—say, $100 per hour. In the first nation, labor productivity grows by 1 percent
per year. In the second, it grows by 2 percent per year. Use a calculator or a spreadsheet to
determine how much output per hour each nation will be producing 20 years later, assuming that
labor productivity growth rates do not change. Then, determine how much each will be producing
per hour 100 years later. What do your results tell you about the effects of small differences in
productivity growth rates?
Over long periods, small differences in productivity growth rates have significant impacts on the
economy’s ability to produce and, therefore, on the standard of living. The following table shows
that a 1 percent growth rate in the productivity of labor causes the value of the output per worker
to rise from $100 to $122 in 20 years. However, if the growth rate of output is 2 percent, the
increase in the value of the productivity of the worker is much larger, rising from $100 to $149 in
20 years. After 100 years, the change in the value of labor’s productivity is even more
pronounced for the higher growth rate. At 1 percent, the value has risen to $270, whereas at a
growth rate of 2 percent, the value has risen to $724. Just a 1 percentage point difference in
growth rate creates a $454 dollar difference in value over 100 years. At a 1 percent growth rate
over 100 years, the value increases by 2.7 times its original value. At a 2 percent growth rate, the
value increases by over 7 times its original value.
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
--2112
1% Rate of Growth
in Output per Worker
$100
$101
$102
$103
$104
$105
$106
$107
$108
$109
$110
$112
$113
$114
$115
$116
$117
$118
$120
$121
$122
--$270
2% Rate of Growth
in Output per Worker
$100
$102
$104
$106
$108
$110
$113
$115
$117
$120
$122
$124
$127
$129
$132
$135
$137
$140
$143
$146
$149
20 years
----$724
100 Years
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Chapter 8
3.1
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116
(Technological Change and Unemployment) What are some examples, other than those given in
the chapter, of technological change that has caused unemployment? And what are some examples
of new technologies that have created jobs? How do you think you might measure the net impact
of technological change on overall employment and GDP in the United States?
Technological change in the banking industry has reduced the need for bank tellers. ATM
machines, debit cards, and electronic banking perform most of the tasks a bank teller once
performed. At the same time, the new technology of the banking industry has created a need for
management information systems experts and technicians and for calm, verbal people to explain
the system to a worried, frustrated, confused customer trying to bank in this new “virtual”
banking system. Often the technological change decreases the need for certain positions but
creates new positions to facilitate and carry out the new technology.
Both the growth rate of GDP and the direction of change and the level of the unemployment rate
can give some measure of the net impact of technological change on overall employment and GDP
in the United States. If unemployment rates have fallen in the last year, there is no evidence that
technological change has caused a loss of jobs. In fact, a lower unemployment rate usually means
that there are more jobs in the economy. If the rate of growth of real GDP was positive and strong
during the last year, there is evidence of growth in income and the standard of living.
SUPPLEMENTAL CASES, EXERCISES, AND PROBLEMS
Case Studies
These cases are available to students online at www.cengagebrain.com.
Computers, the Internet, and Productivity Growth
The first microprocessor, the Intel 4004, could perform about 400 computations per second when it hit the
market in 1971. IBM’s first personal computer, introduced a decade later, executed 330,000 computations
per second. Today a $500 PC can handle over 6 billion computations per second, or 15 million times what
the 1971 Intel 4004 could do. Such advances in computing power have fueled a boom in computer use and
made the United States a world leader. U.S. companies and universities are well ahead of other countries
in high technology applications, ranging from software to biotechnology.
Computers help people work together. For example, design engineers in California can use the Web to
test new ideas with marketers in New York, cutting development time in half. Sales representatives on the
road can use laptops or other wireless devices to log orders and serve customers. U.S. insurance
companies can coordinate data entry done as far away as India to handle claims more efficiently. An
owner of multiple restaurants can use the Internet to track sales up to the minute, check the temperatures of
freezers, refrigerators, and fryers, and observe each restaurant through a live video feed. New generations
of machines monitor themselves and send messages detailing any problems as they arise. For example,
General Electric uses the Internet to keep tabs on factory equipment thousands of miles away. Some home
appliances, such as refrigerators and TVs, are also Internet compatible. Computers not only improve the
quality and safety in many industries, including automobiles and airlines, but they increase theversatility of
machines, which can be reprogrammed for different tasks.
Computers boost productivity through two channels: (1) efficiency gains in the production of computers
and semiconductors and (2) greater computer use by industry. These two channels account for much of the
gain in productivity growth since 1996. Although computer hardware manufacturers make up only a tiny
fraction of the U.S. economy, their pace of innovation quickened enough since 1996 to boost overall U.S.
productivity growth. For example, Intel’s 3.1-gigahertz Pentium 4 processor sold for under $100, much
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Chapter 8
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less than the $990 for the 1.1-gigahertz Pentium 3 it ultimately replaced. What’s more, efficiency in
semiconductor production and price declines since 1996 advanced IT use by business more generally,
which also enhanced labor productivity. America invested more and earlier in IT than did other major
economies, so productivity benefits showed up here first. The jump in labor productivity that began in the
1990s resulted from greater investment in information and communication technology.
Finding the best way to use new technology takes time. There are usually lags between when a new
technology is introduced and when the benefits show up—for example, cash registers tied to the inventory
system in warehouses (think Wal-Mart) and communications systems connected to offices in different
buildings and even different countries (think General Electric). What really set the productivity gains in
motion was the big drop in semiconductor prices during the late 1990s. Going digital became a no-brainer
for business. Computers per worker increased, which boosted labor productivity throughout the entire
economy but especially in the service sector. The question is how long can the productivity pop from
computers and the Internet last? Northwestern University’s Robert Gordon argues that the economy
enjoyed a one-time boost from computers and the Internet. Other economists are more upbeat, but they
acknowledge that it takes a steady stream of innovations to keep U.S. productivity growing.
Sources: Dale Jorgenson, Mun Ho, and Kevin Stiroh, “A Retrospective Look at the U.S. Productivity
Growth Resurgence,” Journal of Economic Perspectives, 22 (Winter 2008): 3–24; “Something Is Not
Working,” The Economist, 29 April 2010; and “U.S. Productivity Growth in Quarter Tops Forecast,” New
York Times, 6 May 2010. The federal government’s labor productivity home page is
http://www.bls.gov/lpc/home.htm.
Income and Happiness
The Declaration of Independence in 1776 identified “certain unalienable Rights, that among these are Life,
Liberty, and the Pursuit of Happiness.” This did not guarantee happiness but did establish the pursuit of
happiness as an “unalienable” right, meaning that right cannot be taken away, given away, or sold.
Eighteenth-century philosopher and social reformer Jeremy Bentham argued that government policy
should promote the greatest happiness for the greatest number of people.
Many people today apparently agree. In recent polls, 77 percent of Australians and 81 percent of Brits
believed that a government’s prime objective should be promoting the greatest happiness rather than the
greatest wealth. The United Nations sponsored an international conference on “Happiness and Public
Policy.” Thailand now compiles a monthly Gross Domestic Happiness Index. Even China has joined in the
fun, reporting a happiness index based on polling results about living conditions, income, the environment,
social welfare, and employment. Australia, Canada, Germany and the United Kingdom are also developing
indexes of happiness or well being. For example, the Canadian Index of Well Being will contain a
measure of social connectedness, among other things.
Economists have long shied away from asking people how they feel, preferring instead to observe their
behavior. But more now see some value in asking questions. In the most extensive of polls, the Gallup
organization asked people in 130 countries: “How satisfied are you with your life, on a scale of zero to
ten?” The results, are not surprising. Most people in the high income areas, such as the United States,
Europe, and Japan, said they are happy. Most people in the poor areas, especially in Africa, said they are
not. Also, within a given country, income and happiness are positively related. After evaluating all the
results of the Gallup world poll, Angus Deaton of Princeton concluded: “The very strong global
relationship between per capita GDP and life satisfaction suggests that on average people have a good idea
of how income, or the lack of it, affects their lives.”
So these results are no surprise. What does puzzle economists is that other surveys suggest that
Americans on average do not seem any happier over time even though each generation became richer than
the last. The proportion of Americans who say they are happy has stayed about the same despite 60 years
of economic growth.
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Chapter 8
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The United States is unusual in that regard. Surveys in Europe and Japan do find an increase in
happiness with increases in income over time. Here’s a possible explanation. Americans begin taking for
granted those luxuries they most desired. For example, two generations ago color TVs, automobiles, and
major appliances were luxuries, but now they are must-have items for most households. Computers and
flat screen HDTVs will soon move from luxuries to necessities. As each generation attains a higher
standard of living, people become less sensitive to the benefits, they take them for granted, and thus they
say they are no happier.
Sources: Jon Gertner, “The Rise and Fall of the GDP,” New York Times, 10 May 2010; Daniel Gilbert,
Stumbling On Happiness (New York: Knopf, 2006); Guglielmo Caporale et al. “Income and Happiness
Across Europe: Do Reference Values Matter?” Journal of Economic Psychology, 30 (February 2009): 42–
51; Angus Deaton, “Income, Health, and Well-Being Around the World: Evidence from the Gallup World
Poll,” Journal of Economic Perspectives, 22 (Spring 2008): 53–72; and Betsey Stevenson and Justin
Wolfers, “The Paradox of Declining Female Happiness,” American Economic Journal: Economic Policy,
1 (August 2009): 190–225.
Experiential Exercises
1. Send students to the Bureau of Labor Statistics (BLS) page on Quarterly Labor Productivity at
http://www.bls.gov/lpc/ to get the latest news release on productivity and costs. Have them rank the
various sectors of the U.S. economy from highest to lowest according to their most recent productivity
growth rates. Ask them if what they found makes sense to them? Why or why not?
2. The BLS also compiles international data on manufacturing productivity at
http://stats.bls.gov/news.release/prod4.toc.htm. Ask students to find which nations have enjoyed the
most rapid growth in manufacturing productivity for the most recent period. Which nations have
experienced the slowest growth? Has productivity actually declined anywhere? How could this be
related to the convergence theory explained in this chapter?
3. Technological change is an important driver of economic growth. Ask students to find a story about a
new innovation in the “Technology” column in the Wall Street Journal Marketplace section. How will
this innovation affect the U.S. production possibilities frontier? Does it seem likely to affect
employment as well? If so, which types of workers will be harmed, and which will benefit?
4. (Global Economic Watch) Go to the Global Economic Crisis Resource Center. Select Global Issues
in Context. In the Basic Search box at the top of the page, enter the word "productivity." On the
Results page, go to the Global Viewpoints Section. Click on the link for the May 15, 2009, article
"Will Productivity Pull Us Out?" Traditionally, why do Canada and Europe experience slower
productivity growth after a recession than does the U.S.?
The article speculated that the U.S. labor market demonstrates more flexibility and adaptability.
Employees can be laid off more quickly, but if output stays constant or falls more slowly, then output
per worker—productivity—actually increases.
5. (Global Economic Watch) Go to the Global Economic Crisis Resource Center. Select Global Issues
in Context. In the Basic Search box at the top of the page, enter the phrase "economic convergence."
Choose one article. Does it support the concept of economic convergence or not? Explain why.
Student answers will vary. The theory of convergence predicts that the standard of living in
economies around the world will grow more similar over time.
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Chapter 8
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119
Additional Questions and Problems
(From student Web site at www.cengagebrain.com)
1.
(Productivity) As discussed in the text, per capita GDP in many developing countries depends on the
fertility of land there. However, many richer economies have little land or land of poor quality. How
can a country with little land, or unproductive land, become rich?
The ability to produce food is important in certain countries with very large populations and
relatively small manufacturing sectors, such as China and India. Recalling that “land” includes all
natural resources, nations (such as Saudi Arabia and Kuwait) that rely on oil exports for revenue
also depend on the productivity of land.
Some small countries have eliminated their reliance on land productivity by developing
manufacturing sectors while importing the necessary raw materials or creating service sectors.
Switzerland is a small country with one of the highest per-capita income levels in the world. To some
extent, Sweden also relies on large exports of services, such as banking.
The United States is blessed with both high land productivity and a large manufacturing sector. It
exports large amounts of both agricultural products (such as wheat, soybeans, and corn) as well as
large amounts of manufactured goods (automobiles, computers, aircraft) and services (banking,
insurance).
2.
(Labor Productivity) What two kinds of changes in the capital stock can improve labor productivity?
How can each type be illustrated with a per-worker production function? What determines the slope
of the per-worker production function?
The two kinds of changes are an increase in the quantity of capital and improvement in the quality of
capital. Quantity increases are represented by a movement along a given per-worker production
function’s curve. Quality improvements are illustrated by an upward rotation in the curve. The perworker production function slopes upward because more capital per worker increases output per
worker. However, the curve becomes less steep as more and more capital is added due to the law of
diminishing marginal returns.
3.
(Slowdown in Labor Productivity Growth) What slowed the rate of growth in labor productivity
during the 1974-1982 period?
First, an increase in oil boosted inflation and contributed to three recessions. Second, legislation to
protect the environment and improve workplace safety caused production costs to increase.
4.
(Output per Capita) Explain how output per capita can grow faster than labor productivity. Is it
possible for labor productivity to grow faster than output per capita?
If employment grows faster than the population as a whole, output per capita can increase faster
than productivity per worker. With a higher percentage of the population working, output per capita
can grow faster than output per worker.
If population grows at a faster rate than employment, it is possible for labor productivity to grow
faster than output per capital.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Chapter 8
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(Technology and Productivity) What measures can government take to promote the development of
practical technologies?
The government can use taxes, subsidies, and regulations to promote particular technologies. The
government can provide tax credits or accelerate depreciation for selected areas. Subsidies provide
direct government underwriting of the costs of the necessary research and development. Pollution
regulations, for example, can encourage firms to develop new technologies for controlling emissions,
create more fuel-efficient automobiles, and so on.
6.
(Basic and Applied Research) What is the difference between basic and applied research? Relate this
to the human genome project—research aimed at developing a complete map of human
chromosomes, showing the location of every gene.
Basic research is not designed for practical applications; it is the search for knowledge for the sake
of knowledge itself. Applied research uses basic research to answer specific questions (for example,
how to reduce wind resistance for an automobile) or develop specific products (for example, the
photocopying process). The human genome project is basic research, but it has great potential for
leading to applied research. Locating the genes for certain illnesses such as breast cancer or cystic
fibrosis can lead to the development of new therapies for treating these illnesses.
7.
(Rules of the Game) How do “rules of the game” affect productivity and growth? What types of
“rules” should a government set to encourage growth?
“Rules of the Game” are the formal and informal institutions that promote economic activity. A
stable political climate and well-established property rights are paramount to encouraging
investment. Improvements in political stability, the establishment and enforcement of property
rights, the creation of incentives for research and development, and improvements in infrastructure
would all encourage growth
8.
(International Productivity Comparisons) How does output per capita in the United States compare
with output per capita in other industrial economies? How has this comparison changed over time?
Output per capita is total output divided by the population. The U.S. produces more output per
capita than any other major economy. Among the seven major industrialized market economies, the
U.S. growth in output per capita has been third highest. From 1948 to 1973, the 2.4 percent U.S.
annual growth rate of real GDP per capita was only about half the 4.7 percentage for the other
industrial countries of the G-7. Productivity slowed from 1974-1982 but has since rebounded. From
1983-2010, the U.S. has the third highest rate of growth in output per capita.
9. (Industrial Policy) Define industrial policy. What are some arguments in favor of industrial policy?
Industrial policy is the use by the government of taxes, subsidies, and regulations, specifically with
the purpose of nurturing certain industries and technologies that the government considers
important for the country’s future health. Policies are designed to provide domestic producers with
an advantage over foreign producers. One argument for industrial policy is that the necessary
research and development to expand the target industries is often very expensive—so much that an
individual firm cannot raise the needed funds. Another argument is that one firm’s research may
provide spillover effects for other industries—benefits that do not accrue to the developer. Since
developers do not realize all of the gains from their research and base their decisions only on the
gains that they do realize, there is a tendency to underinvest in research
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Chapter 8
10.
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121
(Technological Change and Unemployment) Explain how technological change can lead to
unemployment in certain industries. How can it increase employment?
Technological change can lead to unemployment if it reduces the number of workers needed to
produce a given amount of output. In addition, it can make certain skills obsolete so that workers
with those skills are no longer employed. However, technological change increases labor
productivity and can make output more affordable, leading to an increased quantity demanded,
increased production, and increased employment. Also, technological change can lead to the
development of new industries, which would result in the creation of new jobs.
11.
(Convergence) Explain the convergence theory. Under what circumstances is convergence unlikely
to occur?
The convergence theory claims that technologically poor countries start to catch up with the
technologically rich countries. The richer countries have limited growth because they rely on
technological breakthroughs. The poorer countries can borrow technology from the richer countries,
since copying technology is easier than developing new technology. The theory claims that lessdeveloped countries will grow faster than more-developed countries.
Convergence may not occur if there are large disparities between the quality of human capital
among the countries. Less-developed countries are less able to adopt technologies created in the
more-developed countries if their labor forces do not have the knowledge, skills, and training to use
the new technology. In addition, some less-developed countries lack the stable macroeconomic
environment as well as the stable governments and financial institutions needed to nurture economic
growth.
12.
(Productivity) What factors might contribute to a low level of productivity in an economy?
Regardless of the level of labor productivity, what impact does slow growth in labor productivity
have on the economy’s standard of living?
The productivity of an economy may be due to a variety of factors, such as (a) a low quality of its
workforce, (b) a low quantity of physical capital, (c) deficient quality of physical capital, (d) a low
level of technology, (e) poor methods for organizing production, and (f) institutional and social
factors that adversely affect incentives of the resource suppliers. As productivity decreases, fewer
goods and services are produced from a given amount of resources, thus lowering the standard of
living.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8
Productivity and Growth
122
ANSWERS TO ONLINE CASE STUDIES
1.
(CaseStudy: Computers and Productivity Growth) How has the increased use of computers affected
U.S. productivity in recent years? Is the contribution of computers expected to increase or decrease
in the near future? Explain.
Computers affect productivity through their use and because of efficiency gains in the production
and capabilities of computers and semiconductors. The impact in the future is uncertain. On the
one hand, computer use in the U.S. has already risen dramatically so future gains may be lower. On
the other hand, advances in computing power continue; and as use rises, new avenues for utilization
are discovered.
2.
(CaseStudy: The Pursuit of Happiness) How would you explain the finding that people in highincome economies seem happier than people in low-income economies, but, over time, people in
high-income economies do not seem to be any happier even if their country grows richer?
There are two possible explanations. First, the luxuries of one generation become the necessities of
the next generation. People begin taking for granted products they once desired. Second, if relative
income is important, as it seems to be, then a general rise in average incomes over time does not
translate into a general rise in happiness because the average relative position does not necessarily
improve.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.