Transcript AP Macro: Unit 6

AP Macro: Unit 6
“Economic Growth and Productivity”
Source:
Facts:
• In today’s dollars, the median American family
income in 1909 was $8,000
• In 2009, the median American household’s
income was about $50,000
• 50% of world population today has a lower
standard of living than U.S. a century ago
• China and India have only recently achieved
the standard of living of the U.S. a century ago
Growth Rates
• From 1909-2009, U.S. RGDP increased an
average of 1.9% each year
• Rule of 70: tells how long it takes RGDP (or
any other variable) to double
• Ex: U.S. RGDP grows at 2% per year. How long
will it take for RGDP to double?
• 70/2 = 35 years
Sources of Long-run Growth
• The most important ingredient: rising (labor)
PRODUCTIVITY
• Sustained growth in RGDP per capita occurs
only when the amount of output produced by
the average worker increases steadily
• RGDP/ number of people working
Why are we more productive than
ever?
• Physical capital- today’s worker makes use of
about $130,000 worth of physical capital; a
backhoe can dig much more trench than a
person equipped with a shovel
• Human capital- in 1910, 13.5% of Americans
had graduated from high school and 3% had
graduated from college. By 2009, the
percentages were 86% and 27%, respectively
Productivity (continued)
• Studies show that education is an even more
important determinant of growth in
productivity than increases in physical capital
• Technology- probably the most important
driver of productivity growth; small inventions
like grocery bags and Post-It notes have
contributed just as large inventions like the
railroad and semi-conductor chip
Comparing Long Run Growth
• “East Asia’s Miracle:” South Korea, Taiwan,
Hong Kong, Singapore, and China
• “Latin America’s Disappointment:” Argentina,
Brazil, and Chile
• “Africa’s Troubles:” Nigeria and others south
of the Sahara
East Asia
• Since 1975, the region has increase
RGDP/capita by 6% per year (remember, the
U.S. has grown at 2% per year)
• How? High national savings have allowed
them to drastically increase physical capital
per worker (the big “I” in GDP)
• Emphasis on education and technology
increased human capital
Korea Advanced Institute of Science and Technology
(KAIST)
East Asia (continued)
• “Catch-up effect-” it’s easier to narrow the
productivity gap for countries with very low rates
(easier to climb to the top than stay there)
• “Convergence hypothesis-” relatively poor
countries should (and often do) have higher rates
of growth in RGDP/capita than relatively rich
countries; the gaps tend to narrow over time (this
is evident in East Asia, but not necessarily in Latin
America or Africa, however)
Latin America
• In 1900, regarded as economically viable, with
GDP’s comparable to advanced countries
• Rich in minerals and cultivatable land; attracted
immigrants from Europe
• Why stagnant growth? Low saving and
investment, irresponsible gov’t policies and
political instability; under-emphasis on education
• 1980’s- tried “laissez faire” approach, but only
Chile has achieved notable growth since
Latin America
Africa
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Sub-Saharan Africa population: 780 million
Living standards lower than U.S. 200 yrs ago
Why? Political instability, savage civil wars
War and general anarchy has inhibited growth in
education and infrastructure
• Property rights- extortion because of gov’t
corruption reduces incentive to own
• Ray of light? Since mid-1990’s, Africa’s econ.
Performance has been better than previously
because of markets such as oil and coffee
Keys to Economic Growth
• Adding to Physical Capital- spending higher %
of GDP on investment
• 2009: investment spending was 44% of
China’s GDP; in U.S. it was 18%
• Either domestic savings increases or there is
an increase in foreign investment
• Saving and investment are crucial
Keys to Economic Growth
• Adding to Human Capital- emphasis on
education
• Adding to Technological Progress- scientific
knowledge must be transferred into useful
products and processes
• Research and Development (R&D)- spending
to create new technologies and prepare them
for practical use
• Thomas Edison was R&D pioneer
Governments and Physical Capital
• Infrastructure- roads, ports, power lines,
information networks, and other
underpinnings for economic activity
• The big “G” in GDP; is expansionary fiscal
policy used for infrastructure?