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Principles of
Macroeconomics, 9e
CHAPTER 17 Long-Run Growth
; ;
© 2009 Pearson Education, Inc. Publishing as Prentice Hall
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
Principles of Macroeconomics 9e by Case, Fair and Oster
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CHAPTER 17 Long-Run Growth
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PART IV FURTHER MACROECONOMICS ISSUES
Long-Run Growth
18
CHAPTER OUTLINE
The Growth Process: From Agriculture
to Industry
CHAPTER 17 Long-Run Growth
The Sources of Economic Growth
An Increase in Labor Supply
Increases in Physical Capital
Increases in Human Capital
Increases in Productivity
© 2009 Pearson Education, Inc. Publishing as Prentice Hall
Growth and Productivity in the United
States
Sources of Growth in the U.S. Economy:
1929–1982
Labor Productivity: 1952 I–2007 IV
Economic Growth and Public Policy in
the United States The Size of the
Multiplier
Suggested Public Policies
Growth and the Environment and Issues
of Sustainability
Principles of Macroeconomics 9e by Case, Fair and Oster
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Long-Run Growth
economic growth An increase in the total
output of an economy.
CHAPTER 17 Long-Run Growth
modern economic growth The period of
rapid and sustained increase in output that
began in the Western world with the Industrial
Revolution.
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The Growth Process: From Agriculture to Industry
CHAPTER 17 Long-Run Growth
 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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The Growth Process: From Agriculture to Industry
From Agriculture to Industry: The Industrial Revolution
CHAPTER 17 Long-Run Growth
Beginning in England around 1750, technical
change and capital accumulation increased
productivity significantly in two important
industries: agriculture and textiles.
More could be produced with fewer resources,
leading to new products, more output, and wider
choice.
A rural agrarian society was very quickly
transformed into an urban industrial society.
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The Growth Process: From Agriculture to Industry
Growth in Modern Society
CHAPTER 17 Long-Run Growth
Economic growth continues today, 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 (capital), a better-educated and more
highly skilled workforce (human capital), and
increasingly from innovation and technical change
(new techniques of production) and newly
developed products and services.
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The Growth Process: From Agriculture to Industry
Growth Patterns and the Possibility of Catch-Up
TABLE 17.1 Growth of Real GDP: 1999-2007
Average Growth Rate
Per Year, 1999-2007
CHAPTER 17 Long-Run Growth
Country
United States
2.7
Japan
1.5
Germany
1.5
France
2.1
United Kingdom
2.7
China
9.6
India
7.0
Africa (continent)
4.5
Republic of South Africa (2002-2007)
3.9
Cameroon (2002-2007)
4.0
Zimbabwe (2007-2007)
1.0
Source: Economic Report of the President, 2008.
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The Growth Process: From Agriculture to Industry
Growth Patterns and the Possibility of Catch-Up
CHAPTER 17 Long-Run Growth
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.
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The Sources of Economic Growth
aggregate production function The
mathematical representation of the relationship
between inputs and national output, or gross
domestic product.
CHAPTER 17 Long-Run Growth
An increase in GDP can come about through
1.
An increase in the labor supply.
2.
An increase in physical or human capital.
3.
An increase in productivity (the amount of
product produced by each unit of capital or
labor).
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The Sources of Economic Growth
An Increase in Labor Supply
labor productivity Output per worker hour; the
amount of output produced by an average worker
in 1 hour.
CHAPTER 17 Long-Run Growth
TABLE 17.2 Economic Growth from an Increase in Labor—More Output but
Diminishing Returns and Lower Labor Productivity
Period
Quantity
Of Labor
L
(Hours)
Quantity
Of Capital
K
(Units)
Total
Output
Y
(Units)
Measured
Labor
Productivity
Y/L
1
2
3
4
100
110
120
130
100
100
100
100
300
320
339
357
3.0
2.9
2.8
2.7
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The Sources of Economic Growth
An Increase in Labor Supply
CHAPTER 17 Long-Run Growth
TABLE 17.3 Employment, Labor Force, and Population Growth, 1947–2007
Civilian
Civilian
Noninstitutional
Labor
Population
Force
Over 16 Years Old
Number Percentage
(Millions)
(Millions)
Of
Population
1947
1960
1970
1980
1990
2000
2007
Percentage change, 1947–2007
Annual rate
101.8
117.3
137.1
167.7
189.2
212.6
231.9
+ 127.8%
+ 1.4%
59.4
69.6
82.8
106.9
125.8
142.6
153.1
+ 157.7%
+1.6%
58.3
59.3
60.4
63.7
66.5
67.1
66.0
Employment
(Millions)
57.0
65.8
78.7
99.3
118.8
136.9
146.0
+ 156.1%
+ 1.6%
Source: Economic Report of the President, 2008, Table B-35.
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The Sources of Economic Growth
Increases in Physical Capital
CHAPTER 17 Long-Run Growth
TABLE 17.4 Economic Growth from an Increase in Capital—More Output,
Diminishing Returns to Added Capital, Higher Measured Labor
Productivity
Period
Quantity
Of Labor
L
(Hours)
Quantity
Of Capital
K
(Units)
Total
Output
Y
(Units)
Measured
Labor
Productivity
Y/L
1
100
100
300
3.0
2
100
110
310
3.1
3
100
120
319
3.2
4
100
130
327
3.3
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The Sources of Economic Growth
Increases in Physical Capital
TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2006
(Billions of 2000 Dollars)
CHAPTER 17 Long-Run Growth
Equipment
Structures
1960
645.7
2,273.3
1970
1,108.5
3,094.8
1980
1,910.0
4,047.7
1990
2,613.3
5,304.5
2000
4,090.5
6,301.6
2006
4,841.8
6,776.9
Percentage change, 1960–2006
+649.9%
+198.1%
+4.4%
+ 2.4%
Annual rate
Source: Survey of Current Business, September 2007, Table 15, p. 32 and author’s estimates.
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The Sources of Economic Growth
Increases in Physical Capital
Role of Institutions in Attracting Capital
CHAPTER 17 Long-Run Growth
foreign direct investment (FDI) Investment in
enterprises made in a country by residents outside
that country.
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The Sources of Economic Growth
Increases in Human Capital
CHAPTER 17 Long-Run Growth
TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2006
1940
1950
1960
1970
1980
1990
2000
2006
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
85.5
4.6
6.2
7.7
10.7
16.2
21.3
25.6
28.0
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.
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The Sources of Economic Growth
Increases in Productivity
productivity of an input The amount of output
produced per unit of an input.
Technological Change
CHAPTER 17 Long-Run Growth
invention An advance in knowledge.
innovation The use of new knowledge to produce
a new product or to produce an existing product
more efficiently.
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The Sources of Economic Growth
Increases in Productivity
Economies of Scale
External economies of scale are cost savings that
result from increases in the size of industries.
CHAPTER 17 Long-Run Growth
Other Influences on Productivity
In addition to technological change, other
advances in knowledge, and economies of scale,
other forces may affect productivity.
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Growth and Productivity in the United States
CHAPTER 17 Long-Run Growth
TABLE 17.7 Growth of Real GDP in the United States, 1871–2000
Period
Average Growth
Rate Per Year
Period
Average Growth
Rate Per Year
1871-1889
5.5
1950-1960
3.5
1889-1909
4.0
1960-1970
4.2
1909-1929
2.8
1970-1980
3.2
1929-1940
1.6
1980-1990
3.2
1940-1950
5.6
1990-2000
3.2
Sources: Historical Statistics of the United States: Colonial Times to 1970, Tables F47-70, F98-124; U.S. Department of
Commerce, Bureau of Economic Analysis.
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Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE 17.8 Sources of Growth in the United States, 1929–1982
Percent Of Growth Attributable To Each Source
1929 – 1982
1929 – 1948 1948 – 1973 1973 – 1979
CHAPTER 17 Long-Run Growth
Increases in inputs
53
49
45
94
Labor
20
26
14
47
Capital
14
3
16
29
Education (human
capital)
19
20
15
18
Increases in productivity
47
51
55
6
Advances in knowledge
31
30
39
8
Other factorsa
16
21
16
-2
Annual growth rate in
real national income
2.8
2.4
3.6
2.6
aEconomies
of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
Source: Edward Denison, Trends in American Economic Growth, 1929–1982 (Washington: Brookings Institution, 1985). Reprinted
with permission of The Brookings Institution.
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Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE 17.9 Sources of U.S. Growth, 1995-2004
Percent Contribution 1995-2004
CHAPTER 17 Long-Run Growth
Increases in inputs
71.6
Labor
20.6
Capital
50.7
IT capital
22.8
Non-IT capital
27.9
Increases in productivity
28.4
Source: Information Technology and the American Growth Resurgence. Dale W. Jorgenson,
Mun S. Ho and Kevin J. Stiroh (Cambridge, MA: MIT Press, 2005). Data update provided by
the authors.
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Growth and Productivity in the United States
CHAPTER 17 Long-Run Growth
Labor Productivity: 1952 I–2007 IV
 FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2007 IV
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Growth and Productivity in the United States
Labor Productivity: 1952 I–2007 IV
Improving Productivity
in Health Care
Firms’ Health Clinics Cut Costs
CHAPTER 17 Long-Run Growth
Wall Street Journal
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Economic Growth and Public Policy in the United States
Suggested Public Policies
Policies to Improve the Quality of Education
Policies to Increase the Saving Rate
Policies to Stimulate Investment
Policies to Increase Research and Development
CHAPTER 17 Long-Run Growth
Industrial Policy
Can We Really Measure
Productivity Changes?
One of the leading experts on
technology and productivity
estimates that we have reasonably
good measures of output and
productivity in only about 31
percent of the U.S. economy.
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Growth and the Environment and Issues of Sustainability
TABLE 17.10 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
CHAPTER 17 Long-Run Growth
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
Source: World Bank, “Policies and Institutions for Environmental Sustainability.”
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Growth and the Environment and Issues of Sustainability
 FIGURE 17.3 The Relationship
Between Per-Capita GDP and
Urban Air Pollution
CHAPTER 17 Long-Run Growth
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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Growth and the Environment and Issues of Sustainability
Sustainability of Resource Extraction Growth Strategies
CHAPTER 17 Long-Run Growth
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 skilledlabor base, public investment in infrastructure is
especially important.
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REVIEW TERMS AND CONCEPTS
aggregate production function
catch-up
economic growth
foreign direct investment (FDI)
innovation
CHAPTER 17 Long-Run Growth
Invention
labor productivity
modern economic growth
productivity of an input
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