Transcript Principles of Macroeconomics, Case/Fair/Oster, 10e

PRINCIPLES OF
MACROECONOMICS
PART IV Further Macroeconomics Issues
TENTH EDITION
CASE FAIR OSTER
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Prepared by: Fernando Quijano & Shelly
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PART IV Further Macroeconomics Issues
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Long-Run Growth
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CHAPTER OUTLINE
The Growth Process: From Agriculture to Industry
Sources of Economic Growth
PART IV Further Macroeconomics Issues
Increase in Labor Supply
Increase in Physical Capital
Increase in the Quality of the Labor Supply (Human Capital)
Increase in the Quality of Capital (Embodied Technical
Change)
Disembodied Technical Change
More on Technical Change
U.S. Labor Productivity: 1952 I–2010 I
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Growth and the Environment and Issues of
Sustainability
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output growth The growth rate of the
output of the entire economy.
PART IV Further Macroeconomics Issues
per-capita output growth The growth
rate of output per person in the economy.
labor productivity growth The growth
rate of output per worker.
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The Growth Process: From Agriculture to Industry
 FIGURE 17.1 Economic Growth Shifts
Society’s Production Possibility Frontier
Up and To the Right
PART IV Further Macroeconomics Issues
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 expands society’s
production possibilities, shifting the
ppf up and to the right.
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The Growth Process: From Agriculture to Industry
Beginning in England around 1750, technical change and capital accumulation
increased productivity significantly in two important industries: agriculture and
textiles.
New inventions and new machinery meant that more could be produced with
fewer resources.
Growth meant new products, more output, and wider choice.
PART IV Further Macroeconomics Issues
A rural agrarian society was quickly transformed into an urban industrial society.
Economic growth continues today in the developed world, 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 (physical capital); a better-educated and
more highly skilled workforce (human capital); and increasingly from innovation,
technical change, and newly developed products and services.
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The Growth Process: From Agriculture to Industry
TABLE 17.1 Growth of Real GDP: 1991–2007
PART IV Further Macroeconomics Issues
Country
Average Growth Rates per Year,
percentage points, 1991-2007
United States
3.0
Japan
1.3
Germany
1.7
France
1.9
United Kingdom
2.5
China
10.4
India
6.3
Africa
3.8
catch-up The theory stating that the growth rates of less
developed countries will exceed the growth rates of developed
countries, allowing the less developed countries to catch up.
This idea that gaps in national incomes tend to close over time is called
convergence theory.
An economic historian coined the term the advantages of backwardness over
50 years ago to describe the phenomenon of less developed countries leaping
ahead by borrowing technology from more developed countries.
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Sources of Economic Growth
aggregate production function A mathematical relationship
stating that total GDP (output) depends on the total amount of
labor used and the total amount of capital used.
PART IV Further Macroeconomics Issues
The numbers that are used in Tables 17.2 and 17.4 that follow are based on the
simple production function
Y = 3 × K1/3L2/3.
Both capital and labor are needed for production and increases in either result
in more output.
Using this construct we can now explore exactly how an economy achieves
higher output levels over time as it experiences changes in labor and capital.
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Sources of Economic Growth
Increase in Labor Supply
PART IV Further Macroeconomics Issues
TABLE 17.2 Economic Growth from an Increase in Labor—More Output but
Diminishing Returns and Lower Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
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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Sources of Economic Growth
Increase in Labor Supply
TABLE 17.3 Employment, Labor Force, and Population Growth, 1960–2008
PART IV Further Macroeconomics Issues
Civilian
Noninstitutional
Population
16 and Over
(Millions)
1960
1970
1980
1990
2000
2008
Percentage change, 1960–2008
Annual rate
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117.3
137.1
167.7
189.2
212.6
233.8
+99.3%
+1.4%
Civilian
Labor
Force
Number
Percentage Employment
(Millions) of Population (Millions)
69.6
82.8
106.9
125.8
142.6
154.3
+126.7%
+1.6%
59.3
60.4
63.7
66.5
67.1
66.0
65.8
78.7
99.3
118.8
136.9
145.4
+121.0%
+1.6%
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Sources of Economic Growth
Increase in Physical Capital
PART IV Further Macroeconomics Issues
TABLE 17.4 Economic Growth from an Increase in Capital—More Output, Diminishing Returns
to Added Capital, Higher Labor Productivity
Period
Quantity
of Labor
L
Quantity
of Capital
K
Total
Output
Y
Labor
Productivity
Y/L
Output
per Capital
Y/K
1
100
100
300
3.0
3.0
2
100
110
310
3.1
2.8
3
100
120
319
3.2
2.7
4
100
130
327
3.3
2.5
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Sources of Economic Growth
Increase in Physical Capital
TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2008
(Billions of 2005 Dollars)
PART IV Further Macroeconomics Issues
Equipment
Structures
1960
666.8
2,860.1
1970
1,146.8
3,951.8
1980
1,919.6
5,216.8
1990
2,603.8
6,908.4
2000
4,204.1
8,162.1
2008
5,400.0
9,266.5
Percentage change, 1960–2008
+709.8%
+224.0%
+4.4%
+ 2.4%
Annual rate
foreign direct investment (FDI) Investment in enterprises
made in a country by residents outside that country.
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Sources of Economic Growth
Increase in the Quality of the Labor Supply (Human Capital)
PART IV Further Macroeconomics Issues
TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2008
1940
1950
1960
1970
1980
1990
2000
2008
Percentage with Less
than 5 Years of
School
Percentage with 4
Years of High School
or More
Percentage with 4
Years of College
or More
13.7
11.1
8.3
5.5
3.6
NA
NA
NA
24.5
34.3
41.1
52.3
66.5
77.6
84.1
86.6
4.6
6.2
7.7
10.7
16.2
21.3
25.6
29.4
NA = not available.
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EC ON OMIC S IN PRACTICE
Education and Skills in the United Kingdom
PART IV Further Macroeconomics Issues
In discussions of using
education and health care
to boost labor productivity,
the context is often the
developing economies,
where the overall level of
health and education are
low.
Developed economies like
the United Kingdom are
also concerned about the
skill level of their labor
force as they contemplate their productivity and growth rates.
U.K. Businesses Press for Focus on Skills
The Wall Street Journal
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Sources of Economic Growth
Increase in the Quality of Capital (Embodied Technical Change)
embodied technical change Technical change that
results in an improvement in the quality of capital.
Disembodied Technical Change
PART IV Further Macroeconomics Issues
disembodied technical change Technical change that
results in a change in the production process.
More on Technical 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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Sources of Economic Growth
PART IV Further Macroeconomics Issues
U.S. Labor Productivity: 1952 I–2010 I
 FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2010 I
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Growth and the Environment and Issues of Sustainability
TABLE 17.7
Environmental Scores in the
World Bank Country Policy and
Institutional Assessment 2005
Scores (min = 1, max = 6)
Albania
3
Angola
2.5
Bhutan
4.5
Cambodia
2.5
Cameroon
4
Gambia
3
PART IV Further Macroeconomics Issues
Haiti
2.5
Madagascar
4
Mozambique
3
Papua New Guinea
1.5
Sierra Leone
2.5
Sudan
2.5
Tajikistan
2.5
Uganda
4
Vietnam
3.5
Zimbabwe
2.5
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Growth and the Environment and Issues of Sustainability
PART IV Further Macroeconomics Issues
 FIGURE 17.3
The Relationship
Between Per-Capita
GDP and Urban Air
Pollution
One measure of
air pollution is
smoke in cities.
The relationship
between smoke
concentration
and per-capita
GDP is an
inverted U:
As countries
grow wealthier,
smoke increases
and then
declines.
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Growth and the Environment and Issues of Sustainability
Much of Southeast Asia has fueled its growth through export-led manufacturing.
For countries that have based their growth on resource extraction, there is
another set of potential sustainability issues.
PART IV Further Macroeconomics Issues
Because extraction can be accomplished without a well-educated labor force,
while other forms of development are more dependent on a skilled-labor base,
public investment in infrastructure is especially important.
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REVIEW TERMS AND CONCEPTS
aggregate production function
catch-up
disembodied technical change
embodied technical change
foreign direct investment (FDI)
PART IV Further Macroeconomics Issues
innovation
invention
labor productivity growth
output growth
per-capita output growth
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