1 of 20 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Further Macroeconomics...

1 of 20© 2012 Pearson Education, Inc. Publishing as Prentice Hall

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Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICST E N T H E D I T I O N

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© 2012 Pearson Education, Inc. Publishing as Prentice Hall

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CHAPTER OUTLINE

17Long-Run Growth

The Growth Process: From Agriculture to Industry

Sources of Economic GrowthIncrease in Labor SupplyIncrease in Physical CapitalIncrease in the Quality of the Labor Supply (Human Capital)Increase in the Quality of Capital (Embodied Technical Change)Disembodied Technical ChangeMore on Technical ChangeU.S. Labor Productivity: 1952 I–2010 I

Growth and the Environment and Issues of Sustainability

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output growth The growth rate of the output of the entire economy.

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 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.

FIGURE 17.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and To the Right


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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.

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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TABLE 17.1 Growth of Real GDP: 1991–2007

CountryAverage 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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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.

Sources of Economic Growth

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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TABLE 17.2 Economic Growth from an Increase in Labor—More Output but Diminishing Returns and Lower Labor Productivity

Period

Quantityof Labor

L

Quantityof Capital

K

TotalOutput

Y

LaborProductivity

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


Increase in Labor Supply

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TABLE 17.3 Employment, Labor Force, and Population Growth, 1960–2008

CivilianNoninstitutional

Population16 and Over

(Millions)

CivilianLaborForce

Employment(Millions)

Number(Millions)

Percentageof Population

1960 117.3 69.6 59.3 65.81970 137.1 82.8 60.4 78.71980 167.7 106.9 63.7 99.31990 189.2 125.8 66.5 118.82000 212.6 142.6 67.1 136.92008 233.8 154.3 66.0 145.4Percentage change, 1960–2008 +99.3% +126.7% +121.0%Annual rate +1.4% +1.6% +1.6%


Increase in Labor Supply

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TABLE 17.4 Economic Growth from an Increase in Capital—More Output, Diminishing Returns to Added Capital, Higher Labor Productivity

Period

Quantityof Labor

L

Quantityof Capital

K

TotalOutput

Y

LaborProductivity

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


Increase in Physical Capital

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TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2008 (Billions of 2005 Dollars)

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%

Annual rate +4.4% + 2.4%


Increase in Physical Capital

foreign direct investment (FDI) Investment in enterprises made in a country by residents outside that country.

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TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2008

Percentage with Lessthan 5 Years of

School

Percentage with 4 Years of High School

or More

Percentage with 4 Years of College

or More

1940 13.7 24.5 4.61950 11.1 34.3 6.2

1960 8.3 41.1 7.71970 5.5 52.3 10.71980 3.6 66.5 16.21990 NA 77.6 21.32000 NA 84.1 25.62008 NA 86.6 29.4

NA = not available.


Increase in the Quality of the Labor Supply (Human Capital)

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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.

Education and Skills in the United Kingdom

E C O N O M I C S I N P R A C T I C E

U.K. Businesses Press for Focus on Skills

The Wall Street Journal

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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

disembodied technical change Technical change that results in a change in the production process.

invention An advance in knowledge.

innovation The use of new knowledge to produce a new product or to produce an existing product more efficiently.

More on Technical Change

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FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2010 I


U.S. Labor Productivity: 1952 I–2010 I

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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

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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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.

FIGURE 17.3 The Relationship Between Per-Capita GDP and Urban Air Pollution


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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.

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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aggregate production function

catch-up

disembodied technical change

embodied technical change

foreign direct investment (FDI)

innovation

invention

labor productivity growth

output growth

per-capita output growth

R E V I E W T E R M S A N D C O N C E P T S

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