Transcript GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS

Chapter 9
GROWTH,
PRODUCTIVITY,
AND THE WEALTH
OF NATIONS
Fundamental Economic Goals
• Long-run
– Focus is on how to increase potential output.
• Resource use
• Technology
– Say’s Law: Supply creates its own demand
• Related to Expenditure and Income approaches to GDP
• Short-run
– Potential output is considered to be fixed
– Focus is on how to get the economy operating at its
potential.
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Growth Rates and Living Standards
• The Growth rate makes a huge difference in the long-run
– Compounding
– Rule of 72 – # years to double= 72/ growth rate.
• If China’s per capita income of $2000 grows 9% per year and the
U.S. per capita income of $40,000 grows 1% per year
– Time to double
• U.S. every 72 years
• China every 8 years
– By 2055
• U.S. per capita income about $65,000
• China per capita income about $65,000
8-3
Effects of Growth
Milk (½ gallon)
Beef (1 pound)
1919
Eggs (1 dozen)
Bread (1 pound)
Chicken (3 lb. fryer)
Milk (½ gallon)
Beef (1 pound)
Eggs (1 dozen)
Bread (1 pound)
Chicken (3 lb. fryer)
2009
0
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50
100
Price in minutes of work
150
200
Growth and Income Distribution
• A rising tide raises all ships
• Absolute vs. relative standards of living
• Is per capita income the right measure?
– Means vs. medians
– Income shares
8-5
Sources of Growth
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8-6
Specialization of Labor
Growth-compatible institutions
Investment and capital accumulation
Available resources
Technology
Entrepreneurship
Specialization of Labor
• The economics of pins
• Modern mass production
Growth-Compatible Institutions
• Markets
– Information
• Private ownership of property
– The importance of incentives
– The importance of limited liability--corporations
• The legal system
8-8
– Fairness
– Stability
– Efficiency
Investment and Accumulated Capital
• A key element in growth
• Capital must be productive
• Capital is much more than machines. It includes:
– Human capital – skills that workers gain from experience,
education, and on-the-job training.
– Social capital – the habitual way of doing things that guides
people in how they approach production.
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Available Resources
• The U.S. advantage
• Sustainability of resource use
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Technology and Entrepreneurship
• Waves of technology
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Industrialization
Railroads
Telecommunications
Air transportation
Computers
Bio-technology
• Impact of entrepreneurs
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8-11
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Watt
Whitney
Ford
Gates
Gore
Sources of Real U.S. Growth, 19282007
Physical
capital (19%)
Human
capital (13%)
Technology (35%)
Labor (33%)
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The Production Function
• Production function shows
the relationship between
inputs and outputs.
Q2
Q1
• Output = f(labor, capital, land)
• Growth is shown by a shift in
the production function.
L1
8-13
The Economics of Gloom
THOMAS
MALTHUS
Diminishing Marginal Productivity and
Population Growth
Subsistence level of output per
worker
Output
Production
function
Q2
Q1
L1
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L*
Labor
Diminishing Marginal Productivity
and Technology/Capital
• Predictions of long-term catastrophe were wrong
– Increases in technology and capital overwhelmed diminishing
marginal productivity of labor.
• Can it continue in a world of scarce natural
resources?
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Economic Policies to
Encourage Growth
• Encouraging saving and investment.
• Formalizing property rights and reducing
bureaucracy and corruption.
• Providing more of the right kind of education.
• Promoting policies that encourage technological
innovation.
• Promoting policies that allow taking advantage of
specialization.
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The Convergence Hypothesis
• Convergence hypothesis – per capita income in
countries with similar institutional structures will
converge
• Because:
– Costs of production are lower in other countries
– Investment will flow to those countries
• Consequently:
– U.S. growth will slow and growth rates in other countries will
increase
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The Convergence Hypothesis
• As of the early 2000s the predictions of
convergence have not come true.
• Because:
– Lack of factor mobility
– Differing institutional structure
– Incomparable factors of production
– Technological agglomeration effects
– Learning by doing
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