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18
Long-Run Growth
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
CHAPTER 18: Long-Run Growth
Long-Run Growth
18
Chapter Outline
The Growth Process: From
Agriculture to Industry
The Sources of Economic Growth
An Increase in Labor Supply
Increases in Physical Capital
Increases in Human Capital
Increases in Productivity
Growth and Productivity in the
United States
Sources of Growth in the U.S.
Economy: 1929–1982
Labor Productivity: 1952 I–2005 II
Economic Growth and Public Policy
Suggested Public Policies
Growth Policy: A Long-Run
Proposition
The Pros and Cons of Growth
The Progrowth Argument
The Antigrowth Argument
Summary: No Right Answer
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CHAPTER 18: Long-Run Growth
LONG-RUN GROWTH
economic growth An increase in the
total output of an economy. Defined by
some economists as an increase of
real GDP per capita.
modern economic growth The period
of rapid and sustained increase in real
output per capita that began in the
Western world with the Industrial
Revolution.
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CHAPTER 18: Long-Run Growth
THE GROWTH PROCESS: FROM
AGRICULTURE TO INDUSTRY
FIGURE 18.1 Economic Growth Shifts Society’s Production
Possibility Frontier Up and to the Right
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THE GROWTH PROCESS: FROM
AGRICULTURE TO INDUSTRY
CHAPTER 18: Long-Run Growth
From Agriculture to Industry: The Industrial
Revolution
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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CHAPTER 18: Long-Run Growth
Among the sources of increased productivity and
growth in England around 1750 was:
a. Technical change and capital accumulation.
b. New and more efficient methods of farming.
c. New inventions and new machinery.
d. All of the above.
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CHAPTER 18: Long-Run Growth
Among the sources of increased productivity and
growth in England around 1750 was:
a. Technical change and capital accumulation.
b. New and more efficient methods of farming.
c. New inventions and new machinery.
d. All of the above.
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THE GROWTH PROCESS: FROM
AGRICULTURE TO INDUSTRY
CHAPTER 18: Long-Run Growth
Growth in Modern Society
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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CHAPTER 18: Long-Run Growth
THE SOURCES OF ECONOMIC GROWTH
aggregate production function The
mathematical representation of the
relationship between inputs and national
output, or gross domestic product.
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
CHAPTER 18: Long-Run Growth
AN INCREASE IN LABOR SUPPLY
TABLE 18.1 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
labor productivity Output per worker
hour; the amount of output produced by
an average worker in 1 hour.
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THE SOURCES OF ECONOMIC GROWTH
CHAPTER 18: Long-Run Growth
TABLE 18.2 Employment, Labor Force, and Population Growth, 1947–2004
CIVILIAN
NONINSTITUTIONAL
POPULATION
OVER 16 YEARS OLD
(MILLIONS)
Number
(Millions)
Percentage
of Population
101.8
117.3
137.1
167.7
189.2
212.6
223.4
+ 119.4%
59.4
69.6
82.8
106.9
125.8
142.6
147.4
+ 148.1%
58.3
59.3
60.4
63.7
66.5
67.1
66.0
+ 1.4%
+1.6%
1947
1960
1970
1980
1990
2000
2004
Percentage change, 1947 – 2004
Annual rate
CIVILIAN
LABOR
FORCE
EMPLOYMENT
(MILLIONS)
57.0
65.8
78.7
99.3
118.8
136.9
139.3
+ 144.4%
+ 1.6%
Source: Economic Report of the President, 2005, Table B-35.
As long as the economy and the capital stock are expanding rapidly enough, new entrants
into the labor force do not displace other workers.
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CHAPTER 18: Long-Run Growth
In order for economic growth to increase the standard
of living:
a. The rate of output growth must exceed the rate of
population increase.
b. Income must be distributed equally.
c. The government must practice industrial policy.
d. Citizens must experience improvements in the
quality of life.
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CHAPTER 18: Long-Run Growth
In order for economic growth to increase the standard
of living:
a. The rate of output growth must exceed the
rate of population increase.
b. Income must be distributed equally.
c. The government must practice industrial policy.
d. Citizens must experience improvements in the
quality of life.
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THE SOURCES OF ECONOMIC GROWTH
CHAPTER 18: Long-Run Growth
INCREASES IN PHYSICAL CAPITAL
TABLE 18.3 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
CHAPTER 18: Long-Run Growth
TABLE 18.4 Fixed Private Nonresidential Net Capital Stock, 1960–2003 (Billions of 2000
Dollars)
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
4,138.5
6,287.6
2003
4,523.3
6,525.8
Percentage change, 1960 – 2003
+600.59%
+187.1%
Annual rate
+4.6%
+ 2.5%
Source: Survey of Current Business, September 2004, Table 15, p. 42 and author’s estimates.
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THE SOURCES OF ECONOMIC GROWTH
INCREASES IN HUMAN CAPITAL
CHAPTER 18: Long-Run Growth
TABLE 18.5 Years of School Completed by People Over 25 Years Old, 1940–2003
PERCENTAGE
WITH LESS
THAN 5
YEARS OF
SCHOOL
1940
1950
1960
1970
1980
1990
2000
2003
PERCENTAGE
WITH 4 YEARS
OF HIGH SCHOOL
OR MORE
13.7
11.1
8.3
5.5
3.6
NA
NA
NA
PERCENTAGE
WITH 4 YEARS
OF COLLEGE
OR MORE
24.5
34.3
41.1
52.3
66.5
77.6
84.1
84.6
4.6
6.2
7.7
10.7
16.2
21.3
25.6
27.2
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2005, Table 212.
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THE SOURCES OF ECONOMIC GROWTH
CHAPTER 18: Long-Run Growth
INCREASES IN PRODUCTIVITY
productivity of an input The amount of
output produced per unit of an input.
Technological Change
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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CHAPTER 18: Long-Run Growth
An increase in GDP can come about through:
a. An increase in the labor supply.
b. An increase in physical or human capital.
c. An increase in productivity (the amount of product
produced by each unit of capital or labor).
d. All of the above.
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CHAPTER 18: Long-Run Growth
An increase in GDP can come about through:
a. An increase in the labor supply.
b. An increase in physical or human capital.
c. An increase in productivity (the amount of product
produced by each unit of capital or labor).
d. All of the above.
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THE SOURCES OF ECONOMIC GROWTH
CHAPTER 18: Long-Run Growth
Other Advances in Knowledge
In addition to managerial knowledge, improved
personnel management techniques, accounting
procedures, data management, and the like can
also make production more efficient, reduce
costs, and increase measured productivity.
Economies of Scale
External economies of scale are cost savings
that result from increases in the size of
industries.
Other Influences on Productivity
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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
CHAPTER 18: Long-Run Growth
TABLE 18.6 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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CHAPTER 18: Long-Run Growth
The average growth rate of real GDP in the United
States was highest during the following period:
a. 1950-1960
b. 1960-1970
c. 1970-1980
d. 1980-1990
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CHAPTER 18: Long-Run Growth
The average growth rate of real GDP in the United
States was highest during the following period:
a. 1950-1960
b. 1960-1970
c. 1970-1980
d. 1980-1990
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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
CHAPTER 18: Long-Run Growth
TABLE 18.7 Growth of Real GDP in the United States and
Other Countries, 1986–2004
COUNTRY
AVERAGE
GROWTH RATE
PER YEAR
United States
3.1
Japan
2.3
Germany
2.0
France
2.2
Italy
1.8
United Kingdom
2.7
Canada
2.8
Africa
2.8
Asia (excluding Japan)
9.1
India
5.8
Source: Economic Report of the President, 2005, computed from Table B-112.
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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
CHAPTER 18: Long-Run Growth
SOURCES OF GROWTH IN THE U.S. ECONOMY:
1929–1982
TABLE 18.8 Sources of Growth in the United States, 1929–1982
PERCENT OF GROWTH ATTRIBUTABLE TO EACH SOURCE
1929 – 1982
1929 – 1948
1948 – 1973
1973 – 1979
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). Reprinted with permission of
The Brookings Institution.
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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
CHAPTER 18: Long-Run Growth
TABLE 18.9 Sources of U.S. Growth, 1973–2000
Percent Contribution
1973-1990
Increases in inputs
1990-1995
1995-2000
92
90
83
Labor
40
44
43
Capital
52
46
50
IT capital
14
20
24
Non-IT capital
38
26
26
9
10
17
Increases in productivity
Source: Dale Jorgenson and Kazuyuki Motohashi, “Economic Growth of Japan and the United States in the Information
Age,” Rieti Discussion Paper Series 3-E-015. Cited with the permission of the authors.
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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
CHAPTER 18: Long-Run Growth
LABOR PRODUCTIVITY: 1952 I–2003 II
FIGURE 18.2 Output per Worker Hour (Productivity), 1952 I–2005 II
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ECONOMIC GROWTH AND PUBLIC POLICY
SUGGESTED PUBLIC POLICIES
CHAPTER 18: Long-Run Growth
Policies to Improve the Quality of Education
Policies to Increase the Saving Rate
Policies to Stimulate Investment
Policies to Increase Research and Development
Reduced Regulations
Industrial Policy
industrial policy Government
involvement in the allocation of capital
across manufacturing sectors.
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CHAPTER 18: Long-Run Growth
The accumulation of capital in an economy is
ultimately constrained by:
a. The rate of saving.
b. The rate of spending relative to income growth.
c. Depreciation.
d. Government spending and taxation.
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CHAPTER 18: Long-Run Growth
The accumulation of capital in an economy is
ultimately constrained by:
a. The rate of saving.
b. The rate of spending relative to income growth.
c. Depreciation.
d. Government spending and taxation.
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ECONOMIC GROWTH AND PUBLIC POLICY
CHAPTER 18: Long-Run Growth
GROWTH POLICY: A LONG-RUN PROPOSITION
The fact that progrowth policies can be costly in
the short run and do not produce measurable
results for a long time often pushes them far
down on politicians’ lists of priorities.
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CHAPTER 18: Long-Run Growth
What is industrial policy?
a. Industrial policy calls for the elimination of
government intervention in business activities.
b. Industrial policy calls for government involvement
in the allocation of capital across manufacturing
sectors.
c. Industrial policy calls for the promotion of
competition among domestic and foreign
business firms.
d. Industrial policy government spending and
taxation that favors all business firms in the
economy equally.
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CHAPTER 18: Long-Run Growth
What is industrial policy?
a. Industrial policy calls for the elimination of
government intervention in business activities.
b. Industrial policy calls for government
involvement in the allocation of capital across
manufacturing sectors.
c. Industrial policy calls for the promotion of
competition among domestic and foreign
business firms.
d. Industrial policy government spending and
taxation that favors all business firms in the
economy equally.
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THE PROS AND CONS OF GROWTH
CHAPTER 18: Long-Run Growth
THE PROGROWTH ARGUMENT
Advocates of growth believe that:
-
-
-
Growth is progress.
Capital accumulation and new technology
improve the quality of life.
Growth saves the most valuable commodity—
time.
Growth improves the quality of things that yield
satisfaction directly.
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.
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THE PROS AND CONS OF GROWTH
CHAPTER 18: Long-Run Growth
THE ANTIGROWTH ARGUMENT
Those who argue against economic growth generally
make the following four major points:
Growth Has Negative Effects on the Quality of
Life
Growth Encourages the Creation of Artificial
Needs
consumer sovereignty The notion that
people are free to choose, and that
things that people do not want will not
sell. “The consumer rules.”
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CHAPTER 18: Long-Run Growth
THE PROS AND CONS OF GROWTH
Growth Means the Rapid Depletion of a Finite
Quantity of Resources
Growth Requires an Unfair Income Distribution
and Propagates It
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CHAPTER 18: Long-Run Growth
SUMMARY: NO RIGHT ANSWER
Society must make some hard choices, and there
are many trade-offs.
As long as these trade-offs exist, people will
disagree. The debate in contemporary politics is
largely about the costs and benefits of shifting
more effort toward the goal of economic growth
and away from environmental and social welfare
goals.
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CHAPTER 18: Long-Run Growth
REVIEW TERMS AND CONCEPTS
aggregate production function
consumer sovereignty
economic growth
industrial policy
innovation
invention
labor productivity
modern economic growth
productivity of an input
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