Transcript Growth and Productivity: Long-Run Possibilities

13e
Chapter 17:
Growth and Productivity:
Long-Run Possibilities
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Growth
• Economic growth is the fundamental
determinant of the long-run success of any
nation, the basis source of rising living
standards, and the key to meeting the needs
of the American people.
—Economic Report of the President, 1992
17-2
Learning Objectives
• 17-01. Know the principal sources of
economic growth.
• 17-02. Know the policy tools for
accelerating growth.
• 17-03. Know the pros and cons of continued
growth.
17-3
The Nature of Growth
• Short-run changes in capacity utilization:
– The production possibilities curve (PPC) shows
our short-run limit of production capacity.
– The economy often produces a mix of output
that lies inside the PPC.
– The short-run goal is to achieve full
employment –
that is, to move the economy out to the PPC.
• We do this by putting to use all of our available
resources and our best expertise.
17-4
The Nature of Growth
• Long-run change in capacity to produce:
– To achieve large and lasting increases in output,
we must push the PPC outward – that is, to
increase our productive capacity.
– Economic growth: an increase in output (real
GDP); an expansion of production possibilities.
– Economic growth is also indicated on an AD-AS
diagram as a rightward shift of long-run AS.
• The natural rate of unemployment then shifts to a
higher rate of output (higher real GDP).
17-5
Measures of Growth
• Growth rate: percentage change in real GDP
from one year to the next.
– Economic growth is an exponential process.
– Small changes compound from year to year.
• A shortcut method of indicating growth rate is
to use the Rule of 72:
– To find how many years it takes to double GDP,
divide 72 by the growth rate.
– At 3.5% growth rate, GDP will double in about 20
years.
17-6
Measures of Growth
• GDP per capita: total real GDP divided by
total population.
– This is a measure of living standards.
– It increases only when GDP growth exceeds
population growth.
– In countries where population growth exceeds
GDP growth, living standards fall.
17-7
Measures of Growth
• GDP per worker: real GDP divided by the labor
force.
– A measure of productivity.
– If the labor force grows faster than the population,
GDP per capita grows and living standards rise.
• Productivity is better measured by output per
labor-hour.
– Increases in GDP per capita over recent decades are
due to the rising productivity of the average
American worker.
17-8
Sources of Growth
• Long-run growth of the labor force has
stabilized, so continued growth in real GDP
must rely on productivity growth.
Growth rate of
total output
=
Growth rate of
labor force
+
Growth rate of
productivity
17-9
Sources of Growth
• Higher skills: an increase in labor skills.
– Productivity gains reflect more schooling and more onthe-job training.
• More capital: an increase in the ratio of capital to
labor.
– This is a primary determinant of labor productivity.
– Saving is a basic source of investment financing.
– Consumer saving is minuscule; business saving and
foreign investment have financed this contribution to
our recent productivity gains.
17-10
Sources of Growth
• Technological advancements: development and
use of better capital equipment and products.
–
–
–
–
–
Come from research and development (R&D).
Scientific research.
Product development.
Innovations in production techniques.
All of these lead to new products and lower-cost ways of
producing them.
• Improved management: better use of available
resources in the production process.
– Fostering new entrepreneurship and improving the
quality of continuing management.
17-11
New Growth Theory
• Old growth theory emphasized the
importance of saving and investment in new
plants and equipment – that is, capital
goods.
• New growth theory emphasizes the
importance of investing in ideas. Generating
new ideas and the spread of knowledge are
the primary engines of growth.
17-12
Policy Tools
• Increase human capital investment.
– Improve the quantity and quality of investment
in education.
– Encourage employment-based immigration,
particularly of those with skills in short supply.
17-13
Policy Tools
• Increase physical capital investment.
– Expand investment incentives:
• Faster depreciation schedules.
• Tax credits for new investments.
• Lower business taxes.
– Expand saving incentives.
– Expand infrastructure development.
– Return to fiscal responsibility.
• Higher budget deficits lead to “crowding out.”
17-14
Policy Tools
• Maintain stable expectations.
– Uncertainty about the economic future affects
the behavior of both producers and consumers.
– The following threats may inhibit investment:
•
•
•
•
Increasing government regulation.
Increasing inflation.
Increasing budget deficits and “crowding out.”
Increased business taxes.
17-15
Policy Tools
• Create a favorable institutional context.
– Greater economic freedom fosters faster
economic growth.
•
•
•
•
Secure property rights.
Open international trade.
Lower taxes.
Less regulation.
– This allows for more entrepreneurship and
more opportunity and incentive to invest.
17-16