Production Possibility Frontier & GDP

ASSUMPTIONS

Given Quantity ofLabor (education & Skills)Capital (machines, tools, factories)Land (natural resources)

Fully EmployedTechnology Constant

Housing

CD’s

A M

J

GDP = Gross Domestic Product

Dollar value of all goods & services produced in one year

Measuring Growth Rates

percapitaGDPPopulation

GDP

Page 18GDP = Population x GDP per capita

“Growth”GDP = “Growth" Pop + “Growth”GDP per capita

5% = 3% + 2%

Economic Growth, Population Growth, per capita Income Growth

Traditional Econ View of Growth

GDP Growth > Pop Growth Std Living

5% = 3% + 2%

Productivity of Population (ie, labor)

Capital

Technical Improvements

Traditional Economics

“no limits”

Requires

Requires

Traditional View cont’d

Housing

CD’s

A M

J

“Unlimited Growth”

Ecological Econ View of Growth

GDP Growth > Pop Growth Std Living

5% = 3% + 2%

Productivity of Population (ie, labor)

Capital

Technical Improvements

Requires

RequiresAdd as requirement

Energy

Natural Resources

Waste

“Limited” Amt

Using up

Absorptive Capacity of Environment

Connection between Human Economic Activity &

Environment

GDP Growth > Pop Growth Std Living

Productivity of Population (ie, labor)

Capital

Technical Improvements

Requires

RequiresAdd as requirement

Energy

Natural Resources

Waste

“Limited” AmtUsing up

Absorptive Capacity of Environment

Takes us to “Limits to Growth” Model

MIT’s Limits to Growth Model

Structure of ModelFlow-Chart representation of Mathematical Model

STOCKS: dark shaded boxes

Population

Cultivated land

Pollution

Industrial Capital

Non-Renewable Resources

STOCKS w/ LIMITED SUPPLY

Cultivated Land

Non-Renewable Resources

VARIABLES

Inserted Estimates or Historical

From other boxes or loops

Fertility %, life expectancy, Desired food/person, efficiency of capital %, Investment rate %, Average lifetime of capital

Based on:

1) EXPONENTIAL GROWTH

Population

Industrial Output

2) FIXED RESOURCES

Cultivated land

non-renewable resources

3) FEEDBACK LOOPS

Positive reinforce

Negative self-limiting

If POS > NEG Exponential Growth

If POS > NEG Exponential Growth

Negative LoopIndustrial Output

Uses up Nonrenewable resources

Lesser quality

Lower grades

More effort

Cost

Offsets Output growth

Plug in numbers for variables and Run Model

# 1 “Standard” World Model

Assumptions:No change:

physicalEconomicSocial Relationships

Exponential Growth in:Population

FoodIndustrial Output

Resources

Resources“Force”

“Precipitous Collapse”

Industrial Output(Massive

Unemployment)

Food Production

Death Rate

Population

#2 “Piecemeal” Approaches

Recycling, Efficient Irrigation, New energy Sources

Change Assumptions:A. Double Resources (run model)

Still Collapses

but not caused by depletion of Resources!

Caused by Excessive Pollutioncreated by Faster Industrialization

permitted by Resources

#2 “Piecemeal” Approaches

Recycling, Efficient Irrigation, New energy Sources

Change Assumptions:B. Double Resources & Eliminate Pollution (run

model)

Still Collapses

Population vs. Available Food

Conclusion: remove one “limit” bump up against another

# 3 Avoid “Overshoot” & Collapse

Only if limit growth of what now exponentially

Population

Industrial Output

Will happen A) Conscious Policy self-restraint

B) Collision with natural limits

Criticisms of “Limits to Growth”

Julian Simon, The Ultimate Resource

…the natural world allows, and the developed world promotes through the marketplace, responses to human needs and shortages, in such a manner that one backward step leads to 1.001 steps forward, or thereabouts. That’s enough to keep us headed in a life-sustaining direction. (con’t next slide)

Julian Simon, The Ultimate Resource

The main fuel to speed our progress is our stock of knowledge, and the brake is our lack of imagination. The ultimate resource is people – skilled, spirited and hopeful people who will exert their wills and imaginations for their own benefit, and so, inevitably, for the benefit of us all.

Lesser, Dodds, Zerbe, Environmental Economics & Policy…there is little reason to fear the catastrophic

collapse of societies postulated by the authors of The Limits to Growth. The substitution of competitive markets for rigidly regulated ones has provided new incentives to explore and develop energy and mineral resources. Reserves of many important commodities have been increased, through new discoveries or greater incentives to recycle products that were formerly treated as wastes.

Limits to growth being criticized for not

recognizing:• Human ingenuity technology

• Adaptability

The end