Transcript document

Chapter 16
ECONOMIC GROWTH AND PRODUCTIVITY
Chapter 16
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
After this chapter you should be able to:
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Summarize the causes of economic growth in the United States.
Examine and explain the role played by productivity.
List and explain the reasons why our productivity growth has
varied in recent decades.
Assess the roles of savings, capital, and technology.
List and examine the factors slowing our economic growth.
Discuss and analyze economic growth in the less developed
countries.
Judge the Malthusian theory of population.
Analyze Baumol’s disease.
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The Industrial Revolution and American
Economic Development
 Prior to the Industrial Revolution:
 Old age began around your 40th birthday.
 You lived and died within a few miles of where you were born.
 You spent most of your time farming.
 You were illiterate.
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The Industrial Revolution and American
Economic Development
 The Industrial Revolution made possible sustained
economic growth and rising living standards for
the first time in history.
Began in England around the mid 18th century.
 Entered its 2nd phase in America in the early years of the
20th century, based the mass production of cars, electrical
machinery, steel, oil, and chemicals.
 3rd phase in U.S., Japan, Western Europe, and newly
industrialized countries, based on consumer electronics,
computers, communications, advances in manufacturing.
 4th phase since 1990s, based on information age.

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Economic Growth During the Last Millennium
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Annual Percentage Change in Productivity and
Real GDP, 1970-2012
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Productivity Change in Nonfarm Business Sector,
1947-2012
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How Savings and Investment Affect Productivity
Growth
 Low savings rate  low productivity growth.
 Personal savings is low; personal debt is high.
 Government savings (budget deficits) are growing.
U.S. Gross
Savings Rate
as a % of GDP
16-8
How Savings and Investment Affect Productivity
Growth
 Low rate of investment  low productivity growth
 Capital spending (to replace capital stock) is low
 Investment also  GDP growth (see PPC curves)
Country B has a
higher growth rate
than Country A.
Is Country B China
and Country A the
US?
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U.S. Gross Savings Rate as a Percentage of GDP:
1960-2012
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How Labor Force Changes Affect
Productivity Growth
 In 1870, Americans, Germans, French, Japanese,
and British workers averaged nearly 3,000 hours a
year on the job.

Now it is less than 2,000 hours, with much of the decline
having come since World War II.
 How does our labor force stack up against the rest
of the world?
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Average Number of Hours per Employed Person
in Selected Countries: 1990 and 2011
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The Labor Force: Rising Quantity and
Declining Quality
 Americans are among the world’s hardest working
people (in annual hours).
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Much less vacation time offered (and taken) than Europe.
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The Labor Force: Rising Quantity and
Declining Quality
 Our schools are failing especially in literacy and
quantitative reasoning skills.
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Businesses have trouble finding secretaries who can spell and put
together grammatically correct sentences.
Law firms spend millions of dollars teaching their attorneys how to
write.
Fast-food restaurant chains have found it necessary to place pictures
on their cash registers because so many of their clerks are
numerically challenged.
Though more Americans are graduating high school and college, we
have lower standards.
On a positive note, U.S. does well in indicators such as Nobel prize
recipients.
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The Permanent Underclass:
Poverty, Drugs, and Crime
 The U.S. has a permanent underclass constituting
about 10% of our population.
These people are supported by tax dollars, and many are
members of third- and-fourth-generation welfare
families.
 No other industrialized nation in the world has such a
large dependent population.

 Poverty is closely associated with drugs and crime.
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Restrictions on Immigration
 This country was built by immigrants.
 Before the 1920s,virtually anyone who wanted to
come to the U.S. could.
In the early years of the 20th century, close to a million
people came here each year.
 Restrictive immigration laws were passed to prevent
further dilution of our so-called “vaunted northern
European stock.”
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 More restrictions since 9/11/2001.
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The Role of Technological Change
 Economic growth is largely determined by the rate
of technological change.
 Technological change enables us to produce more
output from the same package of resources, or,
alternatively to produce the same output with
fewer resources.
 Information technology has boosted productivity
(e.g. computer literacy).
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The Role of Technological Change
 From 1973-1995, annual productivity growth was about
1.5%, and it has since doubled.
 How much of this increase was due to computerization and
computer literacy?
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Two thirds, according to economists Stephen Oliner and Daniel
Sichel.
• E.g. FedEx, Wal-Mart, airlines, banks use information technology
to boost productivity.
• Bar codes track inventory, saving customers, retailers, and
manufacturers $40 billion a year.
• B2B commerce on the Internet; Internet sales growing at doubledigit percentage rates.
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Our Inefficient Transportation System
 From early U.S. history to the 1900s, U.S. had the
world’s best transportation system.
 Our railways have deteriorated because of WWII
and suburbanization; growth of national highway
system; and reliance on automobile.
 We have become dependent on imported oil,
building highways, maintenance, and parking lots.
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Our Bloated Health Care System
 U.S. leads the world in administrative health care costs.
 In 1950, we spent less than $500 in today’s dollars on the
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average person’s medical care, compared to $7000 today.
Since 2000, health care costs rising are greater than 4 times
the rate of inflation.
We have fewer doctors per capita than other rich countries.
We spend about 2 times as much per capita than other rich
countries.
Yet, more than 49 million Americans have no medical
insurance.
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Health Care Spending as a Percentage of GDP,
Top Ten Countries, 2010
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The Shift to a Service Economy
 Through the 1970s and 1980s, most of our productivity
growth was in the manufacturing sector.
 “Baumol’s disease”: phenomenon named after NYU
Professor William Baumol:
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Any service is inherently labor intensive.
• Because productivity growth in the labor-intensive service sector
tends to lag behind manufacturing productivity growth, costs in
service-related businesses end up increasing over time.
 Health care is very labor intensive.
 Greatly increases the burden on taxpayers.
 The shock of the baby boomers health care needs may drag
down productivity gains in the coming decades.
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Additional Factors Affecting Our
Rate of Growth
 Since the 1970s, various other factors retarding our
rate of economic growth came into play:
Higher energy and transportation costs.
 Environmental protection requirements.
 Health and safety regulations.
 Rising health care costs.
 The effects of 9/11.
 The effect of military spending.
 The influence of special interest groups, e.g. labor unions,
corporate PACS, trade associations.
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Questions for Further Thought and Discussion
 Does global warming affect our productivity and
our economic growth?
 What can we do about it?
 Cap and trade
 Carbon tax
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Summary: Factors Affecting Our Productivity
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Our low savings rate
Our low rate of investment
The rising quantity of labor
The declining quality of labor
The growth of the permanent underclass and its attendant
problems of poverty, drugs, and crime
Restrictions on immigration
Computerization
Military and other security spending
Globalization
Our inefficient transportation system
Our bloated health care system
Global warming
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Economic Growth in the
Less Developed Countries
 The world can be divided into 3 groups of countries:
 The industrialized nations
 The newly industrializing countries (NICs)
 The less-developed countries (LDCs)
• Those who live in the LDCs are the people who really have
problems.
 Today, more than 2/3 of people in the world live in LDCs.
 About half live at or near the subsistence level.
 Most live in abject poverty, with no hope that they or their
children will have better lives.
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The Poorest Countries in the World
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Economic Growth in the
Less Developed Countries
 The big question is how to get from LDC to NIC
and, ultimately to industrialized.
 The only way to industrialize is to build up capital
in the form of new plant and equipment.
 There are two main ways of doing this:
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Working more and consuming less
• Since the poor nations are barely at subsistence level
it’s pretty hard for them to consume less.
• Because there is often a great deal of unemployment
in preponderantly agriculture economies, those who
want to work more have a hard time finding work.
Grants and loans from industrialized nations.
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The Malthusian Theory of Population
 “Dismal scientist” Thomas Robert Malthus
(1798)
 Population tended to grow geometrically
(1, 2, 4, 8, 16, 32) while food supply grew
arithmetically (1, 2, 3, 4, 5, 6).
 Could be widespread famine, unless
population increases are checked by war,
pestilence, famine or moral restraint
 LDCs can be caught in a bind: need high
birth rates for a labor force and laborintensive growth, but….
 LDCs must plan their spending carefully.
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The Malthusian Theory of Population
 Was Malthus right? Not in the industrialized countries.
 Two things happened to ward off Malthus’s dire
predictions:
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Because of tremendous technological advances in agriculture,
farmers were able to feed many more people.
As industrialization spread, more and more people left the
country for the cities.
• Birth rates fell.
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Economics in Action:
Health Care Costs in the Coming Decade
 Does the U.S. have the greatest health care
system in the world?
 American
life expectancy is below average.
 Childhood immunization rates are below average.
 We have fewer doctors per capita and have fewer
doctor visits per year.
 We are admitted to the hospital less frequently.
 Two-thirds of adults are overweight; one third are
obese.
 Which of this is “good” news?
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Economics in Action:
Health Care Costs
 Baby boom generation enters retirement.
 Inefficient health care system and escalating
cost will drag productivity growth and
consequently our economic growth.
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