©2018 Jennifer P. Wissink, all rights reserved. Growth Lecture 28 Dr. Jennifer P. Wissink ©2018 Jennifer P. Wissink, all rights reserved. May 9, 2018 1

Last But Not Least G R O W T H!!! Growth and the PPF: Easier Said Than Done

Long-Run Growth Economic Growth (the layman) An increase in the total output of an economy. Modern Economic Growth (the historian) The period of rapid and sustained increase in output that began in the Western world with the Industrial Revolution. Economic Growth (the humanist) An increase in people’s standard of living Economic Growth (the economist) An increase in real GDP per capita! An increase in the growth rate of output per worker?  An increase in the growth of real wages?

The Growth Process & The Industrial Revolution: From Agriculture to Industry 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. This type of 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 & better 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.

Robert J. Gordon on Growth George Staller Lecture, May 4, 2017 George Staller, professor emeritus of economics, died in 2009 at his home in Ithaca. He was 82. He taught at Cornell University for 49 years and as a visiting professor at Charles University in Prague, Czechoslovakia, for 15 years. He earned M.A. and Ph.D. degrees from Cornell. His research included studies that compared planned and free market economies, and analyses of industrial growth and industrial output within Soviet Eastern Europe. Robert Gordon, a distinguished professor of economics and social science at Northwestern University and author of The Rise and Fall of American Growth: the U.S. Standard of Living since the Civil War. https://cornell.mediasite.com/Mediasite/Play/3603c6db09914769b908bde2308a1bd41d

Headwinds for US: 1) Education system, 2) Inequality increasing, 3)Socioeconomic and welfare state issues like job loss, decline of marriage, single-family homes, life expectancy, mortality, obesity

Average Growth Rate Per Year TABLE 17.7 Growth of Real GDP in the United States, 1871–2000 Period Average Growth Rate Per Year 1871-1889 5.5 1950-1960 3.5 1889-1909 4.0 1960-1970 4.2 1909-1929 2.8 1970-1980 3.2 1929-1940 1.6 1980-1990 1940-1950 5.6 1990-2000 Sources: Historical Statistics of the United States: Colonial Times to 1970, Tables F47-70, F98-124; U.S. Department of Commerce, Bureau of Economic Analysis.

Some Growth Numbers TABLE 16.1 Growth of Real GDP: 1996–2013 Country Average Growth Rates per Year, Percentage Points, 1996–2013 United States 2.4 Japan 0.8 Germany 1.3 France 1.6 United Kingdom 2.1 China 9.6 India 6.8 Sub-Saharan Africa 5.6 Source: Economic Report of the President, 2015, Table B-4 NOTES: The “catch up” theory states that the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to catch up. The 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.

Long-Run Growth Basic Sources of Growth Human Capital More labor and the knowledge and skills acquired by labor through education and experience. Real Economic “K”apital More K and Better K Capital Deepening: Increases in the stock of capital per worker. Technological Progress More efficient ways of organizing economic affairs that allow an economy to increase output without increasing inputs.

Long-Run Growth Policies Policies to Improve the Quality of Education Policies to Increase the Saving Rate Policies to Decrease Taxes Policies to Stimulate Investment and Risk Taking Policies to Increase Research and Development Policies to Reduce Regulations “Industrial Policy” - Government involvement in the allocation of capital across manufacturing sectors.

Labor Productivity Y/L Marginal Return to Labor Sources of Economic Growth: Increase in Labor Supply Suppose GDP = Y = 3 × K1/3L2/3 Economic Growth from an Increase in Labor More Output but Diminishing Returns and Lower Labor Productivity Period Quantity of Labor L Quantity of Capital K Total Output Y Labor Productivity Y/L Marginal Return to Labor ΔY/ΔL 1 100 300 3.0 ̶ 2 110 320 2.9 2.0 3 120 339 2.8 1.9 4 130 357 2.7 1.8

TABLE 16.3 Employment, Labor Force, and Population Growth, 1960–2014 MyEconLab Real-time data Civilian Noninstitutional Population 16 and Older (Millions) Civilian Labor Force Employment (Millions) Number (Millions) Percentage of Population 1960 117.3 69.6 59.3 65.8 1970 137.1 82.8 60.4 78.7 1980 167.7 106.9 63.7 99.3 1990 189.2 125.8 66.5 118.8 2000 212.6 142.6 67.1 136.9 2010 237.8 153.9 64.7 139.1 2014 247.9 155.9 62.9 146.3 Total percentage change, 1960–2014 +113.4% +124.0% +122.3% Percentage change at annual rate +1.4% +1.5% Between 1960 and 2011, the population 16 and over grew at an annual rate of 1.4 percent, the labor force grew at an annual rate of 1.6 percent, and employment grew at an annual rate of 1.6 percent. Source: Economic Report of the President, 2015, Table B-11.

Labor Productivity Y/L Marginal Return to Capital Sources of Economic Growth: Increase in Physical Capital Suppose GDP = Y = 3 × K1/3L2/3 Economic Growth from an Increase in Capital More Output, Diminishing Returns to Added Capital, Higher Labor Productivity Period Quantity of Labor L Quantity of Capital K Total Output Y Labor Productivity Y/L Output per Capital Y/K Marginal Return to Capital ΔY/ΔK 1 100 300 3.0 ̶ 2 110 310 3.1 2.8 1.0 3 120 319 3.2 2.7 0.9 4 130 327 3.3 2.5 0.8 Observe that (1) additional capital increases labor productivity and (2) there are diminishing returns to capital. The last column in the table shows the decline in output per capital as capital is increased

TABLE 16.5 Fixed Private Nonresidential Net Capital Stock, 1960–2013 (Billions of 2009 Dollars) Equipment Structures 1960 706.1 3,451.3 1970 1,202.0 4,769.3 1980 1,994.0 6,294.8 1990 2,629.0 8,336.5 2000 4,039.4 9,808.9 2010 5,208.2 10,967.0 2013 5,605.8 11,151.8 Total percentage change, 1960–2013 +693.9% +223.1% Percentage change at an annual rate +4.0% + 2.2% Between 1960 and 2013 the stock of equipment grew at an annual rate of 4.0% and the stock of structures grew at an annual rate of 2.2%. Notice that the growth rates of capital in this table are larger than the growth rates of labor in Table 16.3. So, capital has grown relative to labor. Source: U.S. Department of Commerce, Bureau of Economic Analysis., Fixed Asset Tables

Sources of Economic Growth: Increase in the Quality of Labor Supply The level of educational attainment in the United States has risen significantly since 1940. As the quality of labor increases through more education, labor productivity increases. Policy makers in many developed economies are concerned about their ability to continue to generate growth through human capital improvements. An interesting read...Is college worth it? http://www.economist.com/news/united-states/21600131-too-many-degrees-are-waste-money-return-higher-education-would-be-much-better

Sources of Economic Growth: Increase in Quality of Labor Supply Is it a good investment? Want to find Cornell? Check out the site PayScale. http://www.payscale.com/about/education-data/

TABLE 16.6 Years of School Completed by People Older Than 25 Years, 1940–2014 Percentage with Less Than 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 4.6 1950 11.1 34.3 6.2 1960 8.3 41.1 7.7 1970 5.5 52.3 10.7 1980 3.6 66.5 16.2 1990 NA 77.6 21.3 2000 84.1 25.6 2010 87.1 29.9 2014 88.1 32.0 NA = not available Source: Statistical Abstract of the United States, 1990, Table 215, and 2012, Table 229, and Bureau of the Census, 2014, Table 2,Educational Attainment.

Sources of Economic Growth: U.S. Labor Productivity Output per hour of work, labor productivity is a simple measure of how much a typical worker can produce given the amount of capital in the economy and the state of technological progress. From 1947 to the worldwide oil crisis in 1973, labor productivity grew rapidly. Productivity growth fell in the remainder of the 1970s and slowly increased over the next two decades. Since 2007, productivity growth has also slowed from recent trends, partly due to the recession. Economists have used growth accounting to help explain these trends in productivity growth in the United States. Economic research suggests that the oil shocks in the 1970s reduced technological progress but the information revolution in the 1980s and 1990s led to a resurgence of technological progress. U.S. Annual Productivity Growth, 1947–2011 SOURCE: Bureau of Labor Statistics, 2012.

Sources of Economic Growth: Technological Change & Progress Embodied Technical Change Technical change that results in an improvement in the quality of capital. (e.g., store cash registers then and now) Disembodied Technical Change Technical change that results in a change in the production process. (e.g., better organization of factory “floor”; market reforms) Another Distinction Invention: An advance in knowledge. Innovation: The use of new knowledge to produce a new product or to produce an existing product more efficiently. i>clicker question: Which one of the following would be classified as an invention? In 1899 the Bayer Company marketed acetylsalicylic acid as a pain reliever in powder form under the name Aspirin. In 1907 James Spangler combined an old fan motor, a soap box, a broom stick, and a pillow case into a device which was later acquired by William H. Hoover, president of the Hoover Company. Beginning in the late 1950s, the field of nanoscience (or nanotechnology) emerged as scientists developed new techniques for the manipulation of materials billionths of a meter wide. In 2001 Eddie Bauer and other retailers introduce stain and wrinkle resistant slacks using fabric developed by Greensboro, North Carolina based Nano-Tex, LLC. Attached to the fabric’s cotton fibers are molecular structures that create an invisible barrier that causes moisture and stains to bead on top of the fabric and prevent absorption.

What Causes Technological Progress? Many Say R&D Research and Development as a Percent of GDP, 1999 The United States spends more total money than any other country on research and development. However, when the spending is measured as a percentage of each nation’s GDP, Japan spends more. A big part of U.S. spending on research and development is in defense-related areas. SOURCE: National Science Foundation, National Patterns of R&D Resources, 2002, Washington D.C.

Can We Use Economic Analysis to Understand the Drivers of Growth in Different Countries? India and China are the two most populous countries and have also grown very rapidly in recent years. From 1978 to 2004, GDP in China grew at the rate of 9.3 percent per year. From 1978 to 2004, GDP in India grew at a lower rate of 5.4 percent per year. WHY?? Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan used growth accounting to answer this question. China’s rapid growth was caused by more rapid accumulation of physical capital and more rapid technological progress. China invested much more in physical capital and was able to increase its technological progress at a more rapid rate.

Growth and the Environment and Issues of Sustainability Many huge looming questions. Is there climate change? What’s causing it? plants or plants? Who should do what about pollution? need to consider both consumption and production. What kinds of institutions and societal structures can be utilized? Kyoto types of agreements? In 1997, the conference in Kyoto, Japan was widely considered a breakthrough, producing an international treaty to limit emissions of greenhouse gases. What has happened beyond Kyoto? Paris…? Are we running out of resources? Oil? Fresh Water? Farmable Land?

The End - Amen Study hard. Use the class web pages – stay informed. Work loads of problems. Eat well. Take a walk once in a while. Get some sleep. Don’t survive on And last but not least.... Thanks to YOU ALL for a great semester!! And thanks to the TAs for all their hard work. Best of luck on all your finals. I’m looking for good things from you all in our final!!