PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;

Long-Run Growth Prepared by: Fernando & Yvonn Quijano

32 Long-Run Growth PART VI FURTHER MACROECONOMICS ISSUES CHAPTER OUTLINE The Growth Process: From Agriculture to Industry The Sources of Economic Growth An Increase in Labor Supply Increases in Physical Capital Increases in Human Capital Increases in Productivity Growth and Productivity in the United States Sources of Growth in the U.S. Economy: 1929–1982 Labor Productivity: 1952 I–2007 IV Economic Growth and Public Policy in the United States The Size of the Multiplier Suggested Public Policies Growth and the Environment and Issues of Sustainability

Long-Run Growth economic growth An increase in the total output of an economy. modern economic growth The period of rapid and sustained increase in output that began in the Western world with the Industrial Revolution.

The Growth Process: From Agriculture to Industry  FIGURE 32.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and to the Right 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.

The Growth Process: From Agriculture to Industry From Agriculture to Industry: The Industrial Revolution Beginning in England around 1750, technical change and capital accumulation increased productivity significantly in two important industries: agriculture and textiles. More could be produced with fewer resources, leading to new products, more output, and wider choice. A rural agrarian society was very quickly transformed into an urban industrial society.

The Growth Process: From Agriculture to Industry Growth in Modern Society Economic growth continues today, 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 (capital), a better-educated and more highly skilled workforce (human capital), and increasingly from innovation and technical change (new techniques of production) and newly developed products and services.

Average Growth Rate Per Year, 1999-2007 The Growth Process: From Agriculture to Industry Growth Patterns and the Possibility of Catch-Up TABLE 32.1 Growth of Real GDP: 1999-2007 Country Average Growth Rate Per Year, 1999-2007 United States 2.7 Japan 1.5 Germany France 2.1 United Kingdom China 9.6 India 7.0 Africa (continent) 4.5 Republic of South Africa (2002-2007) 3.9 Cameroon (2002-2007) 4.0 Zimbabwe (2007-2007) 1.0 Source: Economic Report of the President, 2008.

The Growth Process: From Agriculture to Industry Growth Patterns and the Possibility of Catch-Up 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.

The Sources of Economic Growth aggregate production function The mathematical representation of the relationship between inputs and national output, or gross domestic product. An increase in GDP can come about through An increase in the labor supply. An increase in physical or human capital. An increase in productivity (the amount of product produced by each unit of capital or labor).

The Sources of Economic Growth An Increase in Labor Supply labor productivity Output per worker hour; the amount of output produced by an average worker in 1 hour. TABLE 32.2 Economic Growth from an Increase in Labor—More Output but Diminishing Returns and Lower Labor Productivity Period Quantity Of Labor L (Hours) Quantity Of Capital K (Units) Total Output Y (Units) Measured Labor Productivity Y/L 1 100 300 3.0 2 110 320 2.9 3 120 339 2.8 4 130 357 2.7

The Sources of Economic Growth An Increase in Labor Supply TABLE 32.3 Employment, Labor Force, and Population Growth, 1947–2007 Civilian Noninstitutional Population Over 16 Years Old (Millions) Civilian Labor Force Employment (Millions) Number (Millions) Percentage Of Population 1947 101 .8 59 .4 58.3 57 .0 1960 117 .3 69 .6 59.3 65 1970 137 .1 82 60.4 78 .7 1980 167 106 .9 63.7 99 1990 189 .2 125 66.5 118 2000 212 142 67.1 136 2007 231 153 66.0 146 Percentage change, 1947–2007 + 127 .8% + 157 .7% + 156 .1% Annual rate + 1 .4% +1 .6% Source: Economic Report of the President, 2008, Table B-35.

The Sources of Economic Growth Increases in Physical Capital TABLE 32.4 Economic Growth from an Increase in Capital—More Output, Diminishing Returns to Added Capital, Higher Measured Labor Productivity Period Quantity Of Labor L (Hours) Quantity Of Capital K (Units) Total Output Y (Units) Measured Labor Productivity Y/L 1 100 300 3.0 2 110 310 3.1 3 120 319 3.2 4 130 327 3.3

The Sources of Economic Growth Increases in Physical Capital TABLE 32.5 Fixed Private Nonresidential Net Capital Stock, 1960–2006 (Billions of 2000 Dollars) Equipment Structures 1960 645 .7 2,273 .3 1970 1,108 .5 3,094 .8 1980 1,910 .0 4,047 1990 2,613 5,304 2000 4,090 6,301 .6 2006 4,841 6,776 .9 Percentage change, 1960–2006 +649 .9% +198 .1% Annual rate +4 .4% + 2 Source: Survey of Current Business, September 2007, Table 15, p. 32 and author’s estimates.

The Sources of Economic Growth Increases in Physical Capital Role of Institutions in Attracting Capital foreign direct investment (FDI) Investment in enterprises made in a country by residents outside that country.

The Sources of Economic Growth Increases in Human Capital TABLE 32.6 Years of School Completed by People Over 25 Years Old, 1940–2006 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 2006 85.5 28.0 NA = not available. Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.

The Sources of Economic Growth Increases in Productivity productivity of an input The amount of output produced per unit of an input. Technological Change invention An advance in knowledge. innovation The use of new knowledge to produce a new product or to produce an existing product more efficiently.

The Sources of Economic Growth Increases in Productivity Economies of Scale External economies of scale are cost savings that result from increases in the size of industries. Other Influences on Productivity In addition to technological change, other advances in knowledge, and economies of scale, other forces may affect productivity.

Average Growth Rate Per Year Growth and Productivity in the United States TABLE 32.7 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.

Percent Of Growth Attributable To Each Source Growth and Productivity in the United States Sources of Growth in the U.S. Economy TABLE 32.8 Sources of Growth in the United States, 1929–1982 Percent Of Growth Attributable To Each Source 1929 – 1982 1929 – 1948 1948 – 1973 1973 – 1979 Increases in inputs 53 49 45 94 Labor 20 26 14 47 Capital 3 16 29 Education (human capital) 19 15 18 Increases in productivity 51 55 6 Advances in knowledge 31 30 39 8 Other factorsa 21 - 2 Annual growth rate in 2.8 2.4 3.6 2.6 real national income aEconomies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth. Source: Edward Denison, Trends in American Economic Growth, 1929–1982 (Washington: Brookings Institution, 1985). Reprinted with permission of The Brookings Institution.

Percent Contribution 1995-2004 Growth and Productivity in the United States Sources of Growth in the U.S. Economy TABLE 32.9 Sources of U.S. Growth, 1995-2004 Percent Contribution 1995-2004 Increases in inputs 71.6 Labor 20.6 Capital 50.7 IT capital 22.8 Non-IT capital 27.9 Increases in productivity 28.4 Source: Information Technology and the American Growth Resurgence. Dale W. Jorgenson, Mun S. Ho and Kevin J. Stiroh (Cambridge, MA: MIT Press, 2005). Data update provided by the authors.

Growth and Productivity in the United States Labor Productivity: 1952 I–2007 IV  FIGURE 32.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

Improving Productivity in Health Care Growth and Productivity in the United States Improving Productivity in Health Care Labor Productivity: 1952 I–2007 IV Firms’ Health Clinics Cut Costs Wall Street Journal

Can We Really Measure Productivity Changes? Economic Growth and Public Policy in the United States Suggested Public Policies Policies to Improve the Quality of Education Policies to Increase the Saving Rate Policies to Stimulate Investment Policies to Increase Research and Development Can We Really Measure Productivity Changes? Industrial Policy One of the leading experts on technology and productivity estimates that we have reasonably good measures of output and productivity in only about 31 percent of the U.S. economy.

Growth and the Environment and Issues of Sustainability TABLE 32.10 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 Cameroon 4 Gambia Haiti Madagascar Mozambique Papua New Guinea 1.5 Sierra Leone Sudan Tajikistan Uganda Vietnam 3.5 Zimbabwe Source: World Bank, “Policies and Institutions for Environmental Sustainability.”

Growth and the Environment and Issues of Sustainability  FIGURE 32.3 The Relationship Between Per-Capita GDP and Urban Air Pollution 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.

Growth and the Environment and Issues of Sustainability Sustainability of Resource Extraction Growth Strategies 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.

REVIEW TERMS AND CONCEPTS aggregate production function catch-up economic growth foreign direct investment (FDI) innovation Invention labor productivity modern economic growth productivity of an input