Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
CHAPTER 30 Long-Run Growth Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair C H A P T E R 30: Long-Run Growth Long-Run Growth • Economic growth refers to an increase in the total output of an economy. Defined by some economists as an increase of real GDP per capita. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 40 C H A P T E R 30: Long-Run Growth Long-Run Growth • Modern economic growth is the period of rapid and sustained increase in real output per capita that began in the Western World with the Industrial Revolution. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 40 C H A P T E R 30: Long-Run Growth The Growth Process: From Agriculture to Industry • The production possibility frontier (ppf) 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 4 of 40 C H A P T E R 30: Long-Run Growth The Growth Process: From Agriculture to Industry • Before the Industrial Revolution in Great Britain, every society in the world was agrarian. • Beginning in England around 1750, technical change and capital accumulation increased productivity in two important industries: agriculture and textiles. • More could be produced with fewer resources, leading to new products, more output, and wider choice. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 5 of 40 C H A P T E R 30: Long-Run Growth The Sources of Economic Growth • An aggregate production function is the mathematical representation of the relationship between inputs and national output, or gross domestic product. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 6 of 40 C H A P T E R 30: Long-Run Growth The Sources of Economic Growth • If you think of GDP as a function of both labor and capital, you can see that 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) © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 7 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply • An increasing labor supply can generate more output, but if the capital stock remains fixed, the new labor will be less productive (diminishing returns). © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 8 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply • Malthus and Ricardo predicted a gloomy future as population outstripped the land’s capacity to produce. However, they forgot the impact of technological change and capital accumulation. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 9 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply • Growth in the labor force, without a corresponding increase in the capital stock or technological change, might lead to growth of output but declining productivity and a lower standard of living. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply 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 1 100 100 300 3.0 2 110 100 320 2.9 3 120 100 339 2.8 4 130 100 357 2.7 © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 11 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply • Labor productivity is the output per worker hour; the amount of output produced by an average worker in 1 hour. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 12 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply Employment, Labor Force, and Population Growth, 1947 – 2002 CIVILIAN CIVILIAN NONINSTITUTIONAL LABOR POPULATION FORCE OVER 16 YEARS OLD Number Percentage EMPLOYMENT (MILLIONS) (Millions) of Population (MILLIONS) 1947 101.8 59.4 58.3 57.0 1960 117.3 69.6 59.3 65.8 1970 137.1 82.8 60.4 78.7 1980 167.7 106.9 63.7 99.3 1990 189.2 125.8 66.5 118.8 2002 214.0 142.5 66.6 134.3 + 110.2 + 139.9 Percentage change, 1947 – 2002 Annual rate + 1.4% + 135.6 +1.6% + 1.6% Source: Economic Report of the President, 2003, Table B-35. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 13 of 40 C H A P T E R 30: Long-Run Growth An Increase in Labor Supply • As long as the economy and the capital stock are expanding rapidly enough, new entrants into the labor force do not displace other workers. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 14 of 40 C H A P T E R 30: Long-Run Growth Increases in Physical Capital • An increase in the stock of capital can increase output, even if it is not accompanied by an increase in the labor force. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 15 of 40 C H A P T E R 30: Long-Run Growth Increases in Physical Capital 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 © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 16 of 40 C H A P T E R 30: Long-Run Growth Increases in Physical Capital • The increase in capital stock is the difference between gross investment and depreciation. • Capital has been increasing faster than the labor force since 1960. When capital expands more rapidly than labor, the ratio of capital to labor (K/L) increases, and this too is a source of increasing productivity. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 17 of 40 C H A P T E R 30: Long-Run Growth Increases in Physical Capital Fixed Private Nonresidential Net Capital Stock, 1960 – 2001 (Billions of 1996 Dollars) EQUIPMENT STRUCTURES 1960 672.7 2,015.7 1970 1,154.8 2,744.2 1980 1,989.8 3,589.1 1990 2,722.5 4,703.5 2001 4,480.0 5,682.5 Percentage change, 1960 – 2001 + 566.0 + 181.9 Annual rate + 4.7% + 2.6% Source: Survey of Current Business, September 2002, Table 15, p. 37. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 18 of 40 C H A P T E R 30: Long-Run Growth Increases in Human Capital Years of School Completed by People Over 25 Years Old, 1940 – 2000 1940 1950 1960 1970 1980 1990 2000 PERCENTAGE WITH LESS THAN 5 YEARS OF SCHOOL 13.7 11.1 8.3 5.5 3.6 NA NA PERCENTAGE WITH 4 YEARS OF HIGH SCHOOL OR MORE 24.5 34.3 41.1 52.3 66.5 77.6 84.1 PERCENTAGE WITH 4 YEARS OF COLLEGE OR MORE 4.6 6.2 7.7 10.7 16.2 21.3 25.6 NA = not available. Source: Statistical Abstract of the United States, 1990, Table 215; and 2002, Table 208. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 19 of 40 C H A P T E R 30: Long-Run Growth Increases in Productivity • Growth that cannot be explained by increases in the quantity of inputs can be explained only by an increase in the productivity of those inputs. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 20 of 40 C H A P T E R 30: Long-Run Growth Increases in Productivity • The productivity of an input is the amount produced per unit of an input. • Factors that affect the productivity of an input include technological change, other advances in knowledge, and economies of scale. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 21 of 40 C H A P T E R 30: Long-Run Growth Increases in Productivity • • Technological change affects productivity in two stages: • First there is an advance in knowledge, or an invention. • Then there is innovation, or the use of new knowledge to produce a new product or to produce an existing product more efficiently. There are capital-saving innovations, and labor-saving innovations. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 22 of 40 C H A P T E R 30: Long-Run Growth Increases in Productivity • External economies of scale are cost savings that result from increases in the size of industries. • Production abatement requirements divert capital and labor from the production of measured output, therefore reducing measured productivity. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 23 of 40 C H A P T E R 30: Long-Run Growth Growth and Productivity in the United States 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. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 24 of 40 C H A P T E R 30: Long-Run Growth Growth and Productivity in the United States Growth of Real GDP in the United States and Other Countries, 1981 – 1998 AVERAGE GROWTH RATE PER YEAR COUNTRY United States Japan Germany France Italy United Kingdom Canada Africa Asia (excluding Japan) 3.2 2.3 2.2 2.1 2.0 2.6 3.1 2.7 7.2 Source: Economic Report of the President, 2002, computed from Table B-112. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 25 of 40 C H A P T E R 30: Long-Run Growth Sources of Growth in the U.S. Economy, 1929 – 1982 Sources of Growth in the United States, 1929 – 1982 PERCENT OF GROWTH ATTRIBUTABLE TO EACH SOURCE 1929 – 1982 1929 – 1948 1948 – 1973 1973 – 1979 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 Increases in inputs 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). © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 26 of 40 C H A P T E R 30: Long-Run Growth Labor Productivity: 1952 – 2003 © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 27 of 40 C H A P T E R 30: Long-Run Growth Labor Productivity: 1952 – 2003 • Some of the explanations for the slowdown in productivity growth in the 1970s include: • A low rate of saving • Increased environmental and government regulations • Lack of spending in R&D • High energy costs © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 28 of 40 C H A P T E R 30: Long-Run Growth Labor Productivity: 1952 – 2003 • Many of these factors turned around in the 1980s and 1990s, yet productivity growth remained low. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 29 of 40 C H A P T E R 30: Long-Run Growth Economic Growth and Public Policy • Policy provisions to improve the quality of education include the new Education Individual Retirement Account that allows savings to earn tax free returns as long as the balance is used to pay for educational expenses. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 30 of 40 C H A P T E R 30: Long-Run Growth Economic Growth and Public Policy • Policies to increase the saving rate include individual retirement accounts that accumulate earnings without paying income tax. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 31 of 40 C H A P T E R 30: Long-Run Growth Economic Growth and Public Policy • The amount of capital accumulation is ultimately constrained by its rate of saving. • The tax system and the social security system in the United States are biased against saving. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 32 of 40 C H A P T E R 30: Long-Run Growth Economic Growth and Public Policy • Some public finance economists favor shifting to a system of consumption taxation rather than income taxation to reduce the tax burden on saving. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 33 of 40 C H A P T E R 30: Long-Run Growth Economic Growth and Public Policy • Other public policies to stimulate economic growth include: • Policies to stimulate investment • Policies to increase research and development • Reduced regulations • Industrial policy, or government involvement in the allocation of capital across manufacturing sectors. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 34 of 40 C H A P T E R 30: Long-Run Growth The Progrowth Argument • Advocates of growth believe growth is progress. • New technologies and production methods lead to new and better products. Capital accumulation and new technology improve the quality of life. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 35 of 40 C H A P T E R 30: Long-Run Growth The Progrowth Argument • Growth saves the most valuable commodity—time. • Growth also improves the quality of things that yield satisfaction directly. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 36 of 40 C H A P T E R 30: Long-Run Growth The Progrowth Argument • Growth produces jobs and higher incomes. With higher incomes we can better afford the sacrifices needed to help the poor. • When population growth is not accompanied by growth in output, unemployment and poverty increase. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 37 of 40 C H A P T E R 30: Long-Run Growth The Antigrowth Argument • Growth has negative effects on the quality of life. • Growth encourages the creation of artificial needs. • Consumer sovereignty is the notion that people are free to choose, and that things that people do not want will not sell. “The consumer rules.” © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 38 of 40 C H A P T E R 30: Long-Run Growth The Antigrowth Argument • Growth means the rapid depletion of a finite quantity of resources. • Growth requires an unfair income distribution and propagates it. © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 39 of 40 C H A P T E R 30: Long-Run Growth Review Terms and Concepts aggregate production function invention consumer sovereignty labor productivity economic growth modern economic growth industrial policy productivity of an input innovation © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 40 of 40