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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 Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 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 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 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