Transcript Chapter 28: Long-Run Growth

Economic Growth
• Economic growth refers to an increase in
the total output of an economy. Defined
by some economists as the increase of
real GDP per capita.
• 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.
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Principles of Economics, 6/e
Karl Case, Ray Fair
Economic Growth
• 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 shifts
society’s production
possibility frontier up and
to the right.
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Principles of Economics, 6/e
Karl Case, Ray Fair
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.
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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.
•
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
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Karl Case, Ray Fair
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).
• 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.
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Economic Growth From
an Increase in Labor
• 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.
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
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Economic Growth From
an Increase in Labor
Employment, Labor Force, and Population Growth, 1947 – 1999
CIVILIAN
NONINSTITUTIONAL
POPULATION
OVER 16 YEARS
OLD
(MILLIONS)
CIVILIAN
LABOR
FORCE
Number
Percentage
(Millions) of Population
EMPLOYMENT
(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
1999
207.8
139.4
67.1
133.5
+ 104.1
+ 134.7
Percentage change, 1947 – 1999
Annual rate
+ 1.4%
+ 134.2
+1.7%
+ 1.7%
Source: Economic Report of the President, 2000, Table B-33.
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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.
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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Karl Case, Ray Fair
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.
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Principles of Economics, 6/e
Karl Case, Ray Fair
Increases in Physical Capital
Fixed Private Nonresidential Net Capital Stock, 1960 – 1998
(Billions of 1996 Dollars)
EQUIPMENT
STRUCTURES
1960
672.5
2,047.7
1970
954.2
2,788.3
1980
1,988.9
3,646.3
1990
2,721.0
4,778.6
1998
3,797.3
5,389.2
Percentage change, 1960 – 1998
+ 464.7
+ 163.2
Annual rate
+ 4.7%
+ 2.6%
Source: Survey of Current Business, April 2000, computed from Tables 1 and 2, p. 21.
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Increases in Human Capital
Years of School Completed by People Over 25 Years Old, 1940 – 1998
1940
1950
1960
1970
1980
1990
1998
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
82.8
PERCENTAGE
WITH 4 YEARS
OF COLLEGE
OR MORE
4.6
6.2
7.7
10.7
16.2
21.3
24.4
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 1999, Table 263.
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Karl Case, Ray Fair
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.
• 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.
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Karl Case, Ray Fair
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.
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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.
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Growth and Output in the United States
Growth of Real GDP in the United States, 1871 – 1999
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
1990-1999
3.1
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.
© 2001 Prentice Hall Business Publishing
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Growth and Output 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)
3.1
2.8
2.1
2.0
1.8
2.4
2.5
2.5
7.3
Source: Economic Report of the President, 2000, computed from Table B-110.
© 2001 Prentice Hall Business Publishing
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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
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).
© 2001 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
2.6
Labor Productivity, 1952 – 2000
© 2001 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Labor Productivity, 1952 – 2000
• 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
• However, many of these factors turned
around in the 1980s and 1990s yet
productivity growth remained low.
© 2001 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
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.
• Policies to increase the saving rate
include individual retirement accounts that
accumulate earnings without paying
income tax.
© 2001 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
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.
• Some public finance economists favor
shifting to a system of consumption
taxation rather than income taxation to
reduce the tax burden on saving.
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Principles of Economics, 6/e
Karl Case, Ray Fair
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.
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Principles of Economics, 6/e
Karl Case, Ray Fair
The Pro-Growth 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.
• In 1995, real GDP per capita was more
than twice what it was in 1950. Since the
1950s, incomes have grown twice as fast
as prices.
© 2001 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Pro-Growth Argument
• Advocates of growth believe growth is
progress.
• Growth gives us more choices.
• New technologies and production
methods lead to new and better products.
Capital accumulation and new technology
improve the quality of life.
• Since the 1950s, incomes have grown
twice as fast as prices so we can buy that
much more.
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Principles of Economics, 6/e
Karl Case, Ray Fair
The Pro-Growth Argument
• Growth saves the most valuable
commodity—time.
• Growth also 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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Principles of Economics, 6/e
Karl Case, Ray Fair
The Anti-Growth Argument
• Growth has negative effects on the quality
of life.
• Growth encourages the creation of
artificial needs.
• Growth means the rapid depletion of a
finite quantity of resources.
• Growth requires an unfair income
distribution and propagates it.
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Principles of Economics, 6/e
Karl Case, Ray Fair