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Economic
Growth:
Theory and Policy
Growth is the ultimate determinant for
our well being

When each person can produce more goods
Or labor productivity increases
Then the society can enjoy more affluent life

Commonly measured by GDP per capita


Growth is the ultimate determinant for
our well being
The industrial revolution raised productivity so
much so people in the modern society can
enjoy better life than people in the traditional
society.
Even we can enjoy air-conditioned house with
the ancient kings could not.
Economic Growth
• Determinants of Growth
– Three Pillars: Capital, Technology, Labor
Quality
• Growth Policy: Encouraging Capital
Formation; Improving Education and
Training
Growth of the U.S. economy
$35,000
$10,000
30,000
$9,000
Per-capita real GDP (left scale)
8,000
7,000
20,000
6,000
5,000
15,000
4,000
Real GDP
(right scale)
10,000
3,000
2,000
Nominal GDP (right scale)
5,000
Billions of
Dollars per Year
25,000
1,000
0
1955
0
1960
1965
1970
1975 1980
Year
1985
1990
1995
2000
Copyright
Copyright©
© 2003
2003
South-Western/Thomson
Southwestern/ThomsonLearning.
Learning All rights reserved.
The Three Pillars of
Productivity Growth
● Capital
♦ For a given technology and labor force, labor
productivity will be higher when the capital
stock is larger.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Three Pillars of
Productivity Growth
● Technology
♦ For given inputs of labor and capital, labor
productivity will be higher when technology is
better.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Three Pillars of
Productivity Growth
● Labor Quality: Education and Training
♦ For a given capital stock and given technology,
labor productivity will be higher when the
workforce has more education and training.
♦ Human Capital = The amount of skill
embedded in the workforce. Measured by
amounts of education and training.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
23-1 Production
Functions
FIGURE
K3
c
Yc
Output
K2
Yb
Ya
0
b
a
K1
L1
Hours of Labor Input
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Growth in the United States and
Asia
G
Next year’s
production
possibilities
N
Consumption Goods
A
This year’s
production
possibilities
g
Consumption Goods
F
Next year’s
production
possibilities
This year’s
production
possibilities
f
B
F
G
Capital Goods
(a) United States
f
g
Capital Goods
(b) Asia
Copyright©
Copyright©
2003
2003
South-Western/Thomson
Southwestern/Thomson Learning.
Learning All rights reserved.
Levels, Growth Rates, and
the Convergence Hypothesis
● Rate of increase of capital, technology, and
workforce size and quality directly related
to rate of productivity growth.
● Convergence hypothesis: The productivity
growth rates of poorer countries tend to be
higher than those of richer countries.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Productivity Levels and Growth
Rates
Real GDP per Capita
Richer country
$10,000
Poorer country
$2,000
Time
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
GDP Growth Rate (2004)
Italy
Germany
France
Japan
United Kingdom
United States
Brazil
India
Russian Federation
China
1.22
1.57
2.32
2.7
3.14
4.2
4.9
6.9
7.14
10.1
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
GDP growth rate by country
(2007)
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
GDP per Capita and GDP
Growth Rates
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Growth Policy: Encouraging
Capital Formation
● Capital Formation = Forming new capital.
Synonymous with investment.
● Investment = The flow of resources into the
production of new capital.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Growth Policy: Encouraging
Capital Formation
● Investment is encouraged by
♦ Lower interest rates
♦ Changes to tax laws
♦ Technological advances
♦ Higher demand
♦ Greater political stability and respect for
property rights
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Improving quality of labor
● More-educated, better-trained workers are
more productive and earn higher wages.
● Education and training enhance
productivity.
● Better health conditions
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Wage Premium for College
Graduates
Percentage Wage Advantage
Females
40
Males
30
20
1973 1975
1980
1985
1990
1995
1999
Year
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Growth Policy: Spurring
Technological Change
● Technological advance spurred by
♦ More education
♦ More capital formation
♦ Research and development
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Avg. Productivity Growth Rates
in the U.S.
2.9
Percent per Year
2.5
1.4
1948–1973
1973–1995
1995–2000
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The Productivity Slowdown
and Speed-Up in the U.S.
● The Productivity Slowdown, 1973-1995
♦ Growth rate of productivity declined sharply
from the early 1970s through the mid 1990s.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown
and Speed-Up in the U.S.
♦ Explanations include:
■Lagging investment; BUT statistics show that
investment as a percentage of GDP stayed constant
during this period.
■High Energy Prices; BUT energy prices fell sharply
in mid-1980s while productivity growth failed to
rise.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown
and Speed-Up in the U.S.
♦ Explanations include:
■Inadequate workforce skills; BUT standard
measures of educational attainment and quality
continued to rise.
■Technological slowdown; BUT technology
advance may have merely slowed relative to the
“golden age” of the ’50s and ’60s before reviving
in the computer era.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown
and Speed-Up in the U.S.
● The Productivity Speed-Up, 1995-??
♦ Productivity growth started speeding up around
1995, rising from 1.4% to about 2.5% per year.
♦ Higher productivity growth likely caused by:
■Surging investment
■Falling energy prices
■Advances in information technology
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Improving Infrastructure in the U.S.
• Improving infrastructure in the U.S. would
raising productivity
• Infrastructure includes electricity supply
and power grid, energy supply, highways,
high speed railroad, buildings,
communication facilities, etc.
Obama: State of Union 2010
• For those who make these claims, I have one simple
•
question: How long should we wait? How long should
America put its future on hold?
You see, Washington has been telling us to wait for
decades, even as the problems have grown worse.
Meanwhile, is not waiting to revamp its economy. is not
waiting. is not waiting. These nations — they're not
standing still. These nations aren't playing for second
place. They're putting more emphasis on math and
science. They're rebuilding their infrastructure. They're
making serious investments in clean energy because
they want those jobs. Well, I do not accept second place
for the U.S.
High speed railroad projects
• It’s a train buff’s dream. High-speed rail, whisking Americans along clean,
•
•
•
•
•
green and lightning fast, with no gas to pump or time on the tarmac.
President Obama gave high-speed rail prime billing in his State of the Union
address,
“From the first railroads to the interstate highway system, our nation has
always been built to compete. There's no reason or should have the
fastest trains, or the new factories that manufacture “
The next day Obama was in Florida announcing a Tampa-Orlando line.
San Diego, San Francisco, Kansas City, St. Louis, Chicago, Milwaukee,
Minneapolis — all lined up to play. What’s really possible? We’ll look at the
global picture.
This hour, On Point: High-speed rail, around the planet.
-Tom Ashbrook
Obama Pushes for High-Speed Rail
Proposed high-speed rail map
Japan’s Shinkansen
Spain builds a nationwide
network, 10,000 kms by 2020
China 220 miles/hour rail
300 billion dollars project
China vs U.S rail plan
by CNN
300
250
200
150
China
U.S.
100
50
0
Spending
2009
Spending
2020
Planned
Current
100 miles avg speed