Download Chap017 - John Zietlow

Growth and Productivity:
Long-Run Possibilities
Chapter 17
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Growth and Productivity
• Rising living standards aren’t inevitable
– How important is economic growth?
– How does an economy grow?
– Is continued economic growth possible? Is it
desirable?
17-2
The Nature of Growth
• There are two ways in which output increases
– Short-run changes in capacity utilization involve
increased use of existing productive resources,
moving us closer to the economy’s production
possibilities curve
– Long-run changes in capacity involve expansion
of productive capacity - a shifting out of the PPC
17-3
Two Types of Growth
0
B
A
Consumption Goods
THE LONG RUN:
expanded capacity
Investment Goods
Investment Goods
THE SHORT RUN:
increased capacity utilization
C
B
A
0
Consumption Goods
17-4
Shifts in Long-Run Supply
LRAS1
LRAS2
Price Level
E2
E1
E3
AD2
AS
AD1
Real Output
To achieve economic growth, the long-run aggregate supply
curve must shift to the right.
17-5
Nominal vs. Real GDP
• Economic growth is referred to in terms of real
GDP, not nominal GDP
– Real GDP: The value of final output produced in a
given period, adjusted for changing prices
• By using base period prices, growth is
measured in real goods and services, not
inflation distorted dollars
17-6
Measures of Growth
• Changes in real GDP are presented as a growth
rate
• Growth rate: Percentage change in real output
from one period to another
– Calculated as the change in real output between
two periods divided by total output in the first
period
17-7
Recent U.S. Growth Rates
Source: Economic Report of the President, 2009
17-8
GDP per Capita: A Measure of
Living Standards
• Growth in GDP per capita is attained only
when the growth of output exceeds population
growth
total GDP
GDP

per capita total population
17-9
GDP per Worker: A Measure of
Productivity
• GDP per capita rises when the labor force
grows faster than the population
– Labor Force: All persons over age 16 who are
either working for pay or actively seeking paid
employment
– Employment rate: The percentage of the adult
population that is employed
17-10
A Rising Employment Rate
17-11
GDP per Worker: A Measure of
Productivity
• The employment rate cannot rise forever
• Increases in GDP per capita can also come
from increases in output per worker
• Productivity: Output per unit of input
Total output
Labor productivity 
Total labor hours
17-12
The Productivity Turnabout
• For economic growth to continue, the
productivity of the average U.S. worker must
rise still further
• Productivity slowdowns constrain GDP growth
– From 1973 to 1995 productivity grew at an
average rate of 1.4 percent
– Jumping to 2.6 percent, productivity grew more
rapidly after 1995
17-13
Productivity Gains
Source: U.S. Department of Commerce
17-14
Sources of Growth
• Future growth depends on two factors:
– Growth rate of the labor force
– Growth rate of productivity
Growth rate of
growth rate of
growth rate of


total output
labor force
productivity
17-15
Sources of Growth
• Sources of productivity gains include:
– Higher skills - an increase in labor skills
– More capital - an increase in the ratio of capital to
labor
– Technological advances - development and use of
better capital equipment and products
– Improved management - better use of available
resources in the production process
17-16
Human-Capital Investment
• Education and skills training have greatly
increased the quality of U.S. labor
• The gains in productivity reflect greater human
capital investment
– Human capital is the knowledge and skills
possessed by the labor force
17-17
Physical-Capital Investment
• A primary determinant of labor productivity is
the rate of capital investment
• To increase productivity the quality and
quantity of capital available to the average
worker must continue to increase
17-18
U.S. Workers Compete Well
U.S. productivity gains are among the fastest of industrial
nations. These gains are fueled by research and development
and investment spending.
Source: U.S. Bureau of Labor Statistics
17-19
Saving and Investment Rates
• Savings are not just a form of leakage, but a
basic source of investment financing
• There must be enough saving to at least
finance net investment
– Net investment: Gross investment less
depreciation
17-20
Household and Business Saving
• Household saving rates in the U.S. have been
notoriously low
• Virtually all U.S. investment has been financed
with business saving and foreign investment
• Foreign investors have poured money into U.S.
plant, equipment, software, and financial needs
17-21
Management Training
• Entrepreneurship and the quality of continuing
management are major determinants of
economic growth
• U.S. corporations spend billions of dollars on
management training
17-22
Research and Development
• Research and development includes scientific
research, product development, innovations in
production techniques, and management
improvements
17-23
New Growth Theory
• Old growth theory emphasized the importance
of saving and investing in new plant and
equipment
• New growth theory emphasizes the importance
of investing in knowledge and ideas
17-24
Policy Tools
• Growth policy makes liberal use of the tools in
the supply-side tool box
–
–
–
–
Increase human capital investment
Increase physical-capital investment
Maintain stable expectations
Pro-growth institutional framework
17-25
Increasing Human Capital Investment
• Governments invest in human-capital by
building, operating, and subsidizing schools
• Immigration laws that promote immigration of
skilled workers increase a nation’s stock of
human capital
17-26
Increasing Physical Capital Investment
• The tax code stimulates investment through
– Faster depreciation schedules
– Tax credits for new investments
– Lower business tax rates
• The government can also use the tax code to
deepen the savings pool that finances
investment
17-27
Infrastructure Development
• The government also directly affects the level
of physical capital through its public works
spending
• Public investments in infrastructure reduce
transportation costs, increase market
efficiency, and expand potential output
17-28
Fiscal Responsibility
• Short-run government policies may lead to a
crowding out of consumer spending and
investment
• Fiscal and monetary policies must be evaluated
in terms of their impact not only on (short-run)
aggregate demand but also on long-run
aggregate supply
17-29
Maintaining Stable Expectations
• Expectations are a critical factor in both
consumption and investment behavior
• A sense of political and economic stability is
critical to any long-run current trends
• Macro policy must be sensitive to long-run
expectations
17-30
Institutional Context
• Prospects for economic growth depend on the
institutional context of a nation’s economy
• Greater economic freedom – secure property
rights, open trade, lower taxes, less regulation
– typically fosters faster growth
17-31
Limitless Growth?
• Could the economy keep growing forever?
• Wouldn’t we use up available resources and
ruin the environment in the process?
• How much long-term growth is really possible
or even desirable?
17-32
Limits to Food Production
• In 1798, Reverend Thomas Malthus predicted
future starvation for England, believing
population increases at a geometric rate while
food supplies increase arithmetically
• Actual output – including agricultural products
– has increased at a geometric rate, not at the
much slower rate predicted by Malthus
17-33
Resource Constraints
• To keep growing, we need productivity
improvements and resource availability
• All doomsday predictions ignore how markets
promote efficient use of scarce resources and
find substitutes for them
17-34
The Possibility and Desirability of
Growth
• There are possibly no limits to growth
• Continued economic growth is desirable so
long as
– It brings a higher standard of living
– It brings an increased ability to produce and
consume socially desirable goods and services
17-35
Growth and Productivity:
Long-Run Possibilities
End of Chapter 17
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.