Download Long-Run Economic Growth

Chapter 24
LONG-RUN ECONOMIC
GROWTH
© 2010 Cengage Learning
Gottheil — Principles of Economics, 6e
1
Economic Principles
Capital-labor and capital-output ratios
Technology and labor productivity
Labor productivity and economic
growth
Saving, investment, and economic
growth
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Gottheil — Principles of Economics, 6e
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Long-Run Economic Growth
The “trajectory” of world GDP over
the course of 400 years is a lot like
the take-off a jet airliner on 7,000 feet
of runway. See Exhibit 1.
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Gottheil — Principles of Economics, 6e
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EXHIBIT 1
GROWTH of GDP By REGION: 1600–2001
(in 1990 International Dollars)
Source: Maddison (2003).
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Gottheil — Principles of Economics, 6e
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Exhibit 1: Growth of GDP by
Region: 1600–2001
Where has the “take-off” in GDP
been less dramatic and why?
• Africa because that continent did not
experience the Industrial Revolution of
Western Europe and North American.
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EXHIBIT 2
ESTIMATES OF WORLD GDP: YEARS
100–1998 (bills of international PPP dollars)
Source: Angus Maddison, University of Greningen.
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Exhibit 2: Estimates of World
GDP: Years 100–1998
While long-run economic growth has
been part of the human experience,
what does Exhibit 2 tell us?
• The last two centuries of world GDP stand in
very sharp contrast to the millennia of
previous GDPs.
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EXHIBIT 3
SHARE OF WORLD GDP, BY SELECTED
COUNTRY OR REGION: 100–1998 (%)
Source: Angus Maddison, University of Greningen.
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Exhibit 3: Share of World GDP, by
Selected Country or Region:
100–1998 (%)
Who were the world’s economic
superpowers over most of the past
2,000 years?
I. India and China
II. The United States and Russia
III. Western Europe and Japan
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Exhibit 3: Share of World GDP, by
Selected Country or Region:
100–1998 (%)
Who were the world’s economic
superpowers over most of the past
2,000 years?
I. India and China
II. The United States and Russia
III. Western Europe and Japan
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Reaching Back
If long-run GDP growth is an indicator,
then economic progress is what world
societies have experienced from time
immemorial.
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Reaching Back
Measured in production, labor force,
capital and productivity per worker,
technology, or living standards, the
economies of the modern world
dwarf the accomplishments of the
economies of ancient civilizations.
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EXHIBIT 4
WORLD GDP PER CAPITA: YEAR 1 to 2000
(in U.S. $)
Source: Angus Maddison, University of Greningen.
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Gottheil — Principles of Economics, 6e
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Exhibit 4: World GDP per Capita:
Year 1 to 2000
What parallel can you see in Exhibit 4
in relation to world GDP?
• The long-run rate of population growth
matches the long-run growth in world GDP.
• Thus, the standard of living—measured by
GDP per capita—has remained virtually
unchanged.
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EXHIBIT 5
GROWTH IN GDP PER CAPITA BY REGION:
YEAR 1 to 2000
Source: Angus Maddison, The World Economy: A Millennial Perspective (OECD, 2001).
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Exhibit 5: Growth in GDP per Capita
by Region: Year 1 to 2000
While historically the world’s standard
of living has increased dramatically
from 1900 to 2000, what is obvious in
Exhibit 5?
• Only a few economies, that of Western
Europe and its offshoots, have enjoyed a
greater part of this increase.
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Long-Run Economic Growth
What caused the upsurge in GDP
during the 18th, 19th, and 20th centuries?
I. The Whiskey Rebellion
II. The European Enlightenment
III. Isaac Newton
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Long-Run Economic Growth
What caused the upsurge in GDP
during the 18th, 19th, and 20th centuries?
I. The Whiskey Rebellion
II. The European Enlightenment
III. Isaac Newton
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EXHIBIT 6
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LONG-RUN ECONOMIC GROWTH
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Exhibit 6: Long Run Economic
Growth
Points a and b in Panel a shows real
GDP on the aggregate supply curve
AS1 with a fixed set of resources.
Panel b shows the possibilities of
higher levels of real GDP with
changing levels of economic
resources.
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Modern Economic Growth
Economic growth
• An increase in real GDP, typically expressed as
an annual rate of real GDP growth.
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Modern Economic Growth
In The Wealth of Nations, Adam Smith
identified four principal factors that
contribute to a nation’s economic
growth. What are they?
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Modern Economic Growth
Smith’s principal factors that contribute
to a nation’s economic growth:
a. The size of its labor force.
b. The degree of labor specialization.
c. The size of its capital stock.
d. The level of its technology
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Modern Economic Growth
Labor productivity
• The quantity of GDP produced per worker,
typically measured in quantity of GDP per hour
of labor.
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Modern Economic Growth
Capital deepening
• A rise in the ratio of capital to labor.
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Modern Economic Growth
Labor skills
• The proficiency to perform actual tasks
and technical functions required in
specific occupational fields. These skills
reflect the laborer’s natural ability,
experience-on-job, and education.
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Modern Economic Growth
Efficiency gains
• The increase in productivity associated
with adoption of new technology and the
reorganization of the workplace to
accommodate the technology.
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Modern Economic Growth
Entrepreneurship
• A person who alone assumes the risks
and uncertainties of business.
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EXHIBIT 7
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THE LABOR PRODUCTIVITY CURVE
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Exhibit 7: The Labor
Productivity Curve
How does capital deepening affect
labor productivity?
• The more capital per laborer, the greater the
laborer’s productivity. Moreover, new
technology can shift upwards the labor
productivity curve.
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Modern Economic Growth
Capital-labor ratio
• The ratio of capital to labor, reflecting the
quantity of capital used by each laborer in
production.
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Modern Economic Growth
1. If capital is $50,000 and labor is 200,
what is the capital-labor ratio?
• The capital-labor ratio is ($50,000/200) = $250.
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Modern Economic Growth
2. If real GDP increases from $10,000
to $12,000, and labor rises from 100
to 105, what has happened to labor
productivity?
• Output per laborer rises from ($10,000)/100
= $100 to ($12,000)/105
= $114.29
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Modern Economic Growth
3. Which of the following represents
capital deepening?
a. Increased worker experience
b. Increased worker training
c. Increased capital-labor ratio
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Modern Economic Growth
3. Which of the following represents
capital deepening?
a. Increased worker experience
b. Increased worker training
c. Increased capital-labor ratio
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Gottheil — Principles of Economics, 6e
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Modern Economic Growth
Capital-output ratio
• The ratio of capital stock to GDP.
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Modern Economic Growth
According to Adam Smith and many
economists today, savings
automatically convert to investment
spending, so that investment-induced
growth is dependent on savings.
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Modern Economic Growth
Changes in technology can increase
labor productivity and GDP without
there being any change in the value
of the capital stock.
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EXHIBIT 8
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THE GROWTH PROCESS
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Exhibit 8: The Growth Process
1. According to Exhibit 8, what will
happen to consumption and
investment next year as a
consequence of investment
this year?
• Investment this year increases next year’s
capital stock, which in turn generates an
increase in next year’s consumption and
investment spending.
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Exhibit 8: The Growth Process
2. What will happen to potential
future economic growth if more of
GDP is consumed and less is
invested?
• Less investment today means less economic
growth in the future.
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Gottheil — Principles of Economics, 6e
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EXHIBIT 9
GROSS NATIONAL SAVING IN THE UNITED
STATES: 1960–2007
Source: Council of Economic Advisors, Economic Report of the President (Washington, D.C., U.S. Government Printing Office, 2007). P. 73.
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Exhibit 9: Gross National Savings in
the United States: 1960–2007
According to Exhibit 9, what is the
relationship between personal
savings and government savings?
• It appears that they may be inversely
proportional.
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Gottheil — Principles of Economics, 6e
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EXHIBIT 10 AVERAGE ANNUAL PRODUCTIVITY
GROWTH, SELECTED COUNTRIES:
1990–2005
Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2007).
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Gottheil — Principles of Economics, 6e
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Exhibit 10: Average Annual
Productivity Growth, Selected
Countries: 1990–2005
What is noteworthy about the
productivity of the United States
compared to other nations?
• U.S. annual productivity growth has
consistently risen over this 16-year period.
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EXHIBIT 11 SOURCES OF LABOR PRODUCTIVITY
GROWTH: 1990–2005
Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2007).
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Exhibit 11: Sources of Labor
Productivity Growth: 1990–2005
What increases brought about the
rise in U.S. productivity in Exhibit
10? Examine Exhibit 11.
• Labor skills
• Capital deepening via major investment
• Efficiency gains through technological
change
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Gottheil — Principles of Economics, 6e
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EXHIBIT 12 REAL GDP AND ANNUAL RATE OF GDP
GROWTH: 1990–2005 (billions 2000 $
and percent)
Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2008).
© 2010 Cengage Learning
Gottheil — Principles of Economics, 6e
48
Exhibit 12: Real GDP and Annual
Rate of GDP Growth: 1990–2005
Despite business cycles, the rate of
GDP grown in Exhibit 12 can be
averaged out to show?
• Eight of the 16 years were greater than 3%.
• The performance of the U.S. economy is
exemplary.
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Gottheil — Principles of Economics, 6e
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How Economics Growth Affects
Your Life
One way of measuring the gains you
personally derive from years of
previous economic growth is to
compare the cost your grandparents
or perhaps great-grandparents had
to pay to acquire things to the cost
you pay now..
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EXHIBIT 13 COST OF AQUIRING A 3-POUND CHICKEN
While the money price of a 3-pound fryer has risen from $1.23 in 1919 to $3.15 today, its real price—work time—has fallen from
2 hours 37 minutes to just 14 minutes.
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Exhibit 13: Cost of Acquiring a
3-Pound Chicken
In terms of dollar cost, your great-grandparents in
1919 bought a chicken for $1.13. You paid $3.15
for it in 1997. Have costs really tripled? Were your
great-grandparents that much better off?
• The gains of economic growth is masked by the use
of “dollar value.” Instead of dollars, calculate the
number of minutes of a day’s work it takes to buy
that chicken.
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EXHIBIT 14 SELECTED GOODS, IN MINUTES OR HOURS
OF WORK TIME: THEN AND NOW
Source: W. Michael Cox and Richard Alm, Time Well Spent, Federal Reserve Bank of Dallas, Annual Report, 1997, pp. 2–14.
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Exhibit 14: Selected Goods, in
Minutes or Hours of Work Time
While a double-decker hamburger cost’s less
now, women’s haircuts are actually more
expensive today than in 1920. New homes are
only slightly less costly. Why?
• The explanation is due to the labor intensity of their
production.
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EXHIBIT 15 PERCENTAGE OF HOUSEHOLDS ENJOYING
THE BOUNTY OF ECONOMIC GROWTH
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Exhibit 15: Percentage of
Households Enjoying the
Bounty of Economic Growth
What is the most recent evidence of economic
growth to have achieved an over 90 percent
presence in U.S. households?
a. Computer
b. Wireless phone
c. Microwave oven
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Exhibit 15: Percentage of
Households Enjoying the
Bounty of Economic Growth
What is the most recent evidence of economic
growth to have achieved an over 90 percent
presence in U.S. households?
a. Microwave oven
b. Wireless phone
c. Computer
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57