Download Economic Growth

Economic Growth
The Production Function
Production Possibilities
Growth Policies
U.S. Economic Growth
2: Actual and Potential GDP in
the United States
FIGURE
11,000
10,500
10,000
9,500
9,000
Actual GDP
8,500
8,000
7,500
Billions of 2000 Dollars
7,000
6,500
Potential GDP
6,000
5,500
5,000
1982 –1983
Recession
4,500
1974 –1975
Recession
4,000
3,500
1960s
Boom
3,000
2,500
1957 –1958
Recession
2,000
1955
1959
1960 –1961
Recession
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2004
Year
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Questions


What causes long-term GDP (potential GDP)
and per-capita GDP (standard of living) to
grow over time?
What types of economic policies can the
government use to stimulate GDP growth?
Growth and Production Function
The key to growth in potential GDP is growth
in labor/worker productivity:
Yp = L* x (Y/L*)
= (Hours of work) x (Labor productivity)
 What drives labor productivity growth?

Three Pillars of Productivity Growth:
(i) Capital (K)
(ii) Technology (TFP)
(iii) Human capital (HK)
- One measure is educational
attainment.
 Productivity Growth and shifts in the
production function.

Growth Accounting in US
1948-73
Labor Productivity
2.8%
Capital
0.9%
Technology
1.9%

73-95 94-02
1.4% 2.8%
1.0% 1.7%
0.4% 1.1%
4: Average Years of Schooling
for Selected Countries
TABLE
Growth and Production Possibilities
Goods can be classified into two types:
(i) Consumption goods – to be
consumed (not used to make goods).
(ii) Capital goods – to be used in the
manufacturing of other goods (may
include human capital)
 GDP must be divided between consumption
and capital goods.

Capital Goods
GDP and Society’s Choices
Today
c
b
PPF0
a
Consumption Goods
Capital Goods
GDP and Society’s Choices:
Tomorrow (if No Capital
Depreciation): Choice a
c
b
PPF0 = PPFa
a
Consumption Goods
Capital Goods
GDP and Society’s Choices
Tomorrow: Choice b
c
b
PPFb
PPFa
a
Consumption Goods
Capital Goods
GDP and Society’s Choices
Tomorrow: Choice c
c
PPFc
PPFb
b
PPFa
a
Consumption Goods


For a given level of technology investment in
physical or human capital is necessary for
economic growth.
Increases in TFP can increase economic
growth for any given capital-consumption
combination.
Capital Goods
GDP and Society’s Choices:
Growth in TFP
PPF1
c
b
PPF0
a
Consumption Goods
International Comparisons

What explains international differences in
standard of living? How have these differences
changed over time?
Poorer countries  low per-capita GDP
Richer countries  high per-capita GDP
Productivity and Growth in Selected
Countries
Country
US
France
UK
Germany
GDP/Hour
1998
(% of US)
100
98
79
77
Growth
1.5
2.5
2.2
2.4

The convergence hypothesis: Productivity
growth of poorer countries tend to be higher
than richer countries. Per-capita GDP among
countries tend to converge.
Productivity in Selected Countries
Country
US
France
UK
Germany
GDP/Hour
1973
(% of US)
100
76
67
62
GDP/Hour
1998
(% of US)
100
98
79
77
Growth
1.5
2.5
2.2
2.4
Figure 2
The Convergence Hypothesis
Reasons for International Convergence
(i) Diminishing Returns
(ii) Learning from Richer Countries
 Problem: Poorest countries are falling
behind. They don’t have
(i) Infrastructure, facilities
(ii) Educational structure

Productivity in Selected Countries
Country
US
France
UK
Germany
Argentina
Mexico
Peru
GDP/Hour
1973
(% of US)
100
76
67
62
45
38
26
GDP/Hour
1998
(% of US)
100
98
79
77
39
29
15
Growth
1.5
2.5
2.2
2.4
0.9
0.5
-0.7
Growth Policies
Capital Formation Policies:
* Lower Interest Rates
* Tax Provisions (capital gains/corporate)
* Political Stability/Property Rights
* Direct Government Investment
 Education and Training
 Helping Developing Countries
(foreign direct investment, World Bank Aid)

5: Average Productivity
Growth Rates in the U.S.
FIGURE
3.0
Percent per Year
2.8
1.4
1948–1973
1973–1995
1995–2004
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Historical Record of U.S. Productivity


Post WWII: 1948-73
* Confidence and business optimism high
* Low Interest Rates
* High government spending on
infrastructure
Productivity Slowdown: 1973-1995
* High energy prices
* Slow pace of technical progress?

1995-present
* Lower energy prices
* Peace Dividend
* Computing and Information Technology