Download Principles of Economics, Case/Fair/Oster, 11e

PRINCIPLES OF
MACROECONOMICS
E L E V E N T H E D I T I O N
CASE  FAIR  OSTER
PEARSON
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
Prepared by: Fernando Quijano w/Shelly
1 ofTefft
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Long-Run Growth
17
CHAPTER OUTLINE
The Growth Process: From Agriculture to Industry
Sources of Economic Growth
Increase in Labor Supply
Increase in Physical Capital
Increase in the Quality of the Labor Supply (Human Capital)
Increase in the Quality of Capital (Embodied Technical
Change)
Disembodied Technical Change
More on Technical Change
U.S. Labor Productivity: 1952 I–2010 I
Growth and the Environment and Issues of
Sustainability
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output growth The growth rate of the output of the entire economy.
per-capita output growth The growth rate of output per person in the
economy.
labor productivity growth The growth rate of output per worker.
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The Growth Process: From Agriculture to Industry
 FIGURE 17.1 Economic Growth
Shifts Society’s Production Possibility
Frontier Up and To the Right
The production possibility frontier
shows all the combinations of
output that can be produced if all
society’s scarce resources are fully
and efficiently employed.
Economic growth expands
society’s production possibilities,
shifting the ppf up and to the right.
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Beginning in England around 1750, technical change and capital accumulation
increased productivity significantly in two important industries: agriculture and
textiles.
New inventions and new machinery meant that more could be produced with
fewer resources.
Growth meant new products, more output, and wider choice.
A rural agrarian society was quickly transformed into an urban industrial society.
Economic growth continues today in the developed world, and while the
underlying process is still the same, the face is different.
Growth comes from a bigger workforce and more productive workers.
Higher productivity comes from tools (physical capital); a better-educated and
more highly skilled workforce (human capital); and increasingly from innovation,
technical change, and newly developed products and services.
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Among the sources of increased productivity and growth in England
around 1750 was:
a.
Technical change and capital accumulation.
b.
New and more efficient methods of farming.
c.
New inventions and new machinery.
d. All of the above.
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Among the sources of increased productivity and growth in England
around 1750 was:
a.
Technical change and capital accumulation.
b.
New and more efficient methods of farming.
c.
New inventions and new machinery.
d. All of the above.
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TABLE 17.1 Growth of Real GDP: 1991–2007
Country
Average Growth Rates per Year,
Percentage Points, 1993-2012
United States
2.5
Japan
0.8
Germany
1.2
France
1.5
United Kingdom
2.1
China
10.1
India
6.9
Sub-Saharan Africa
4.6
catch-up The theory stating that the growth rates of less developed countries
will exceed the growth rates of developed countries, allowing the less
developed countries to catch up.
The idea that gaps in national incomes tend to close over time is called
convergence theory.
An economic historian coined the term the advantages of backwardness over
50 years ago to describe the phenomenon of less developed countries leaping
ahead by borrowing technology from more developed countries.
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Sources of Economic Growth
aggregate production function A mathematical relationship stating that total
GDP (output) depends on the total amount of labor used and the total amount
of capital used.
The numbers that are used in Tables 17.2 and 17.4 that follow are based on the
simple production function
Y = 3 × K1/3L2/3.
Both capital and labor are needed for production and increases in either result
in more output.
Using this construct we can now explore exactly how an economy achieves
higher output levels over time as it experiences changes in labor and capital.
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EC ON OMIC S IN PRACTICE
Government Strategy for Growth
Consider how far an individual country is from the technological frontier of the
rest of the world. The distance from that frontier might influence growth
strategies pursued by that country.
Suppose a country is behind relative to the world at large. A government’s job
here is helping its industries to catch up.
The government knows what the right technology is and can help its firms find
the world frontier. As firms develop and approach the world technological
frontier, growth will come from innovation. For this reason, policies to support
entrepreneurship and improve the workings of venture capital will likely work
better.
Acemoglu and his colleagues argue that governments often shift too late from
policies supporting adoption of other countries’ ideas to supporting their own
innovative efforts.
THINKING PRACTICALLY
1. In recent years China has begun to strengthen its laws on patents. How does this fit
in with the research described here?
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Increase in Labor Supply
In the absence of increases in the capital stock, as labor increases, less and
less output will be added by each new worker. This effect is called diminishing
returns.
With diminishing returns, as labor supply grows, output increases, but at a
declining rate, and increases in the labor supply reduce labor productivity, or
output per worker.
TABLE 17.2 Economic Growth from an Increase in Labor—More Output but
Diminishing Returns and Lower Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
Labor
Productivity
Y/L
Marginal Return
to Labor
ΔY/ΔL
1
100
100
300
3.0
̶
2
110
100
320
2.9
2.0
3
120
100
339
2.8
1.9
4
130
100
357
2.7
1.8
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TABLE 17.3 Employment, Labor Force, and Population Growth, 1960–2011
Civilian
Noninstitutional
Population
16 and Over
(Millions)
1960
1970
1980
1990
2000
2011
Percentage change, 1960–2011
Percentage change at annual rate
117.3
137.1
167.7
189.2
212.6
239.6
+104.3%
+1.4%
Civilian
Labor
Force
Number
Percentage Employment
(Millions) of Population (Millions)
69.6
82.8
106.9
125.8
142.6
153.6
+120.7%
+1.6%
59.3
60.4
63.7
66.5
67.1
64.1
65.8
78.7
99.3
118.8
136.9
139.9
+112.6%
+1.6%
Between 1960 and 2011, the population 16 and over grew at an annual rate of
1.4 percent, the labor force grew at an annual rate of 1.6 percent, and
employment grew at an annual rate of 1.6 percent.
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In order for economic growth to increase the standard of living:
a.
The rate of output growth must exceed the rate of population
increase.
b.
Income must be distributed equally.
c.
The government must practice industrial policy.
d. Citizens must experience improvements in the quality of life.
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In order for economic growth to increase the standard of living:
a.
The rate of output growth must exceed the rate of population
increase.
b.
Income must be distributed equally.
c.
The government must practice industrial policy.
d. Citizens must experience improvements in the quality of life.
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Increase in Physical Capital
There are likewise diminishing returns to capital when more and more capital is
added to a fixed supply of labor.
TABLE 17.4 Economic Growth from an Increase in Capital—More Output, Diminishing Returns
to Added Capital, Higher Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
Labor
Productivity
Y/L
Output
per Capital
Y/K
Marginal
Return to
Capital
ΔY/ΔK
1
100
100
300
3.0
3.0
̶
2
100
110
310
3.1
2.8
1.0
3
100
120
319
3.2
2.7
0.9
4
100
130
327
3.3
2.5
0.8
Observe two things about these numbers. First, additional capital increases
labor productivity—it rises from 3.0 to 3.3 as capital is added. Second, there
are diminishing returns to capital. The last column in the table shows the
decline in output per capital as capital is increased.
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TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2011
(Billions of 2005 Dollars)
Equipment
Structures
1960
670.9
3,001.4
1970
1,154.0
4,149.2
1980
1,931.6
5,480.4
1990
2,620.0
7,257.7
2000
4,230.8
8,570.7
2011
5,509.6
9,878.6
Percentage change, 1960–2011
+721.2%
+229.1%
+4.2%
+ 2.4%
Percentage change at an annual rate
Between 1960 and 2011 the stock of equipment grew at an annual rate of 4.2
percent and the stock of structures grew at an annual rate of 2.4 percent.
Notice that the growth rates of capital are larger than the growth rates of labor
in the previous table. So, capital has grown relative to labor.
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New capital can come from the saving of a country’s residents and/or from the
investments of foreigners.
foreign direct investment (FDI) Investment in enterprises made in a country
by residents outside that country.
Countries with poor institutions, corruption, and inadequate protection for
lenders and investors struggle to attract capital. The World Bank calls countries
with weak institutions fragile countries.
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Increase in the Quality of the Labor Supply (Human Capital)
TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2010
1940
1950
1960
1970
1980
1990
2000
2010
Percentage with Less
than 5 Years of
School
Percentage with 4
Years of High School
or More
Percentage with 4
Years of College
or More
13.7
11.1
8.3
5.5
3.6
NA
NA
NA
24.5
34.3
41.1
52.3
66.5
77.6
84.1
87.1
4.6
6.2
7.7
10.7
16.2
21.3
25.6
29.9
NA = not available.
The level of educational attainment in the United States has risen significantly
since 1940.
As the quality of labor increases through more education, labor productivity
increases. Policy makers in many developed economies are concerned about
their ability to continue to generate growth through human capital
improvements.
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An increase in GDP can come about through:
a.
An increase in the labor supply.
b.
An increase in physical or human capital.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d. All of the above.
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An increase in GDP can come about through:
a.
An increase in the labor supply.
b.
An increase in physical or human capital.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d. All of the above.
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EC ON OMIC S IN PRACTICE
German Jewish Émigrés Contribute to U.S. Growth
By the time World War II began, over 133,000 Jewish émigrés found their way
to the United States. Among them were several thousand academics,
Among the émigrés were a number of chemists. The chemists brought with
them their considerable human capital.
Moser and her colleagues then compared the rate of patenting in the United
States in the period before the emigration with the one right after, looking
specifically at the fields within chemistry in which the new émigrés worked.
Their results? The work indicates that these new U.S. citizens may have
increased patent rates in their fields by more than 30%!
THINKING PRACTICALLY
1. Show on a production possibility frontier the effects of the new German emigration.
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Increase in the Quality of Capital (Embodied Technical Change)
embodied technical change Technical change that results in an improvement
in the quality of capital.
An increase in the quality of capital increases labor productivity (more output
for the same amount of labor). We thus have our third answer as to why labor
productivity has increased over time—the quality of capital has increased
because of embodied technical change.
Disembodied Technical Change
disembodied technical change Technical change that results in a change in
the production process.
To the extent that disembodied technical changes are mostly positive, this is
our fourth answer as to why labor productivity has increased. People have
figured out how to run production processes and how to manage firms more
efficiently.
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More on Technical Change
The main point to keep in mind is that technical change, regardless of how it is
categorized, increases labor productivity.
invention An advance in knowledge.
innovation The use of new knowledge to produce a new product or to
produce an existing product more efficiently.
A commonly used measure of inputs into research is the fraction of GDP spent.
The United States will lose some of its edge in technology unless more
funding is provided. In 2007, the National Academies of Science argued as
follows:
Although many people assume that the United States will always be a world
leader in science and technology, this may not continue to be the case
inasmuch as great minds and ideas exist throughout the world. We fear the
abruptness with which a lead in science and technology can be lost—and the
difficulty of recovering a lead once lost, if indeed it can be recovered at all.
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U.S. Labor Productivity: 1952 I–2012 IV
 FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2012 IV
There was a slowdown in productivity growth in the 1970s. Some of the
explanations for this slow down included a low rate of saving, environmental
and government regulation, and little spending on R&D. Many of these factors
turned around in the 1980s and 1990s and productivity rose to 1.9% in the
1990s through 2012.
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The accumulation of capital in an economy is ultimately constrained by:
a.
The rate of saving.
b.
The rate of spending relative to income growth.
c.
Depreciation.
d.
Government spending and taxation.
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The accumulation of capital in an economy is ultimately constrained by:
a.
The rate of saving.
b.
The rate of spending relative to income growth.
c.
Depreciation.
d.
Government spending and taxation.
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Growth and the Environment and Issues of Sustainability
TABLE 17.7
Environmental Scores in the
World Bank Country Policy
and Institutional Assessment
2005 Scores (min = 1, max = 6)
Albania
3
Angola
2.5
Bhutan
4.5
Cambodia
2.5
Cameroon
4
Gambia
3
Haiti
2.5
Madagascar
4
Mozambique
3
Papua New Guinea
1.5
Sierra Leone
2.5
Sudan
2.5
Tajikistan
2.5
Uganda
4
Vietnam
3.5
Zimbabwe
2.5
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The scores in this table include
factors such as education,
mortality, and income growth. A
set of environmental criteria
including clean air, clean water,
and conservation management is
also taken into account.
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Clean water and clean air are what economists call normal goods. That is, as
people get richer, they want to consume more of these goods.
 FIGURE 17.3 The
Relationship Between PerCapita GDP and Urban Air
Pollution
One measure of air
pollution is smoke in cities.
The relationship between
smoke concentration and
per-capita GDP is an
inverted U:
As countries grow
wealthier, smoke increases
and then declines.
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Much of Southeast Asia has fueled its growth through export-led manufacturing.
For countries that have based their growth on resource extraction, there is
another set of potential sustainability issues.
Because extraction can be accomplished without a well-educated labor force,
while other forms of development are more dependent on a skilled-labor base,
public investment in infrastructure is especially important.
The question of whether the natural resource base imposes strong natural
limits on growth has been debated since the time of Malthus.
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In 1972, the Club of Rome, a group of “concerned citizens,” contracted with a
group at MIT to do a study entitled The Limits to Growth. The work involved
computer simulations that assumed present growth rates of population, food,
industrial output, and resource exhaustion. According to these data, sometime
after the year 2000 the limits will be reached and the entire world economy will
come crashing down:
Collapse occurs because of nonrenewable resource depletion. The
industrial capital stock grows to a level that requires an enormous input
of resources. In the very process of that growth, it depletes a large
fraction of the resource reserves available. As resource prices rise and
mines are depleted, more and more capital must be used for obtaining
resources, leaving less to be invested for future growth. Finally,
investment cannot keep up with depreciation and the industrial base
collapses, taking with it the service and agricultural systems, which
have become dependent on industrial inputs (such as fertilizers,
pesticides, hospital laboratories, computers, and especially energy for
mechanization)....Population finally decreases when the death rate is
driven upward by the lack of food and health services.
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Under the assumption that clean air and clear water are normal goods, the
relationship between per capita GDP and urban air pollution is as follows:
a.
As countries grow wealthier, smoke increases and then declines.
b.
As countries grow wealthier, smoke steadily increases until a very
large fraction of resources is depleted.
c.
As per capita GDP increases, air pollution increases up until the
industrial base collapses, then pollution begins to decline.
d.
As per capita GDP increases, pollution increases without the
possibility of ever declining, causing the death rate to increase.
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Under the assumption that clean air and clear water are normal goods, the
relationship between per capita GDP and urban air pollution is as follows:
a. As countries grow wealthier, smoke increases and then declines.
b.
As countries grow wealthier, smoke steadily increases until a very
large fraction of resources is depleted.
c.
As per capita GDP increases, air pollution increases up until the
industrial base collapses, then pollution begins to decline.
d.
As per capita GDP increases, pollution increases without the
possibility of ever declining, causing the death rate to increase.
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The accumulation of capital in an economy is ultimately constrained by:
a.
The rate of saving.
b.
The rate of spending relative to income growth.
c.
Depreciation.
d.
Government spending and taxation.
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How should one trade off the obvious gains from growth in terms of the lives of
those in the poorer nations against environmental goals? Recognizing the
existence of these trade-offs and trying to design policies to deal with them is
one of the key tasks of policy makers.
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REVIEW TERMS AND CONCEPTS
aggregate production function
catch-up
disembodied technical change
embodied technical change
foreign direct investment (FDI)
innovation
invention
labor productivity growth
output growth
per-capita output growth
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