CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 27 PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 of 27

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster PART VI FURTHER MACROECONOMICS ISSUES 32 Fernando & Yvonn Quijano Prepared by: Long-Run Growth

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 27 The Growth Process: From Agricultureto IndustryThe Sources of Economic GrowthAn Increase in Labor SupplyIncreases in Physical CapitalIncreases in Human CapitalIncreases in ProductivityGrowth and Productivity in the UnitedStatesSources of Growth in the U.S. Economy: 1929–1982 Labor Productivity: 1952 I–2007 IVEconomic Growth and Public Policy inthe United States The Size of theMultiplierSuggested Public PoliciesGrowth and the Environment and Issuesof Sustainability CHAPTER OUTLINE 32 PART VI FURTHER MACROECONOMICS ISSUES Long-Run Growth

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 27 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 27 The Growth Process: From Agriculture to Industry 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 32.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and to the Right

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 27 The Growth Process: From Agriculture to Industry 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. From Agriculture to Industry: The Industrial Revolution

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 27 The Growth Process: From Agriculture to Industry 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. Growth in Modern Society

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 27 The Growth Process: From Agriculture to Industry Growth Patterns and the Possibility of Catch-Up TABLE 32.1 Growth of Real GDP: Country Average Growth Rate Per Year, United States2.7 Japan1.5 Germany1.5 France2.1 United Kingdom2.7 China9.6 India7.0 Africa (continent)4.5 Republic of South Africa ( )3.9 Cameroon ( )4.0 Zimbabwe ( )1.0 Source: Economic Report of the President, 2008.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 27 The Growth Process: From Agriculture to Industry 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. Growth Patterns and the Possibility of Catch-Up

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 27 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 1.An increase in the labor supply. 2.An increase in physical or human capital. 3.An increase in productivity (the amount of product produced by each unit of capital or labor).

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 27 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

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 27 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 Percentage change, 1947– % % % Annual rate+ 1.4%+1.6%+ 1.6% Source: Economic Report of the President, 2008, Table B-35.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 27 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

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 27 The Sources of Economic Growth Increases in Physical Capital TABLE 32.5 Fixed Private Nonresidential Net Capital Stock, 1960–2006 (Billions of 2000 Dollars) EquipmentStructures , ,108.53, ,910.04, ,613.35, ,090.56, ,841.86,776.9 Percentage change, 1960– %+198.1% Annual rate+4.4%+ 2.4% Source: Survey of Current Business, September 2007, Table 15, p. 32 and author’s estimates.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 27 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 27 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 NA NA NA NA = not available. Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 27 The Sources of Economic Growth Increases in Productivity Technological Change productivity of an input The amount of output produced per unit of an input. invention An advance in knowledge. innovation The use of new knowledge to produce a new product or to produce an existing product more efficiently.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 27 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. In addition to technological change, other advances in knowledge, and economies of scale, other forces may affect productivity. Other Influences on Productivity

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 27 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 YearPeriod Average Growth Rate Per Year 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 27 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 – – – – 1979 Increases in inputs Labor Capital Education (human capital) Increases in productivity Advances in knowledge Other factors a  2 Annual growth rate in real national income a Economies 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 27 Growth and Productivity in the United States Sources of Growth in the U.S. Economy TABLE 32.9 Sources of U.S. Growth, Percent Contribution Increases in inputs71.6 Labor20.6 Capital50.7 IT capital22.8 Non-IT capital27.9 Increases in productivity28.4 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 27 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

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 27 Growth and Productivity in the United States Labor Productivity: 1952 I–2007 IV Improving Productivityin Health Care Firms’ Health Clinics Cut Costs Wall Street Journal

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 27 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 Industrial Policy Can We Really MeasureProductivity Changes? 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 27 Growth and the Environment and Issues of Sustainability TABLE Environmental Scores in the World Bank Country Policy and Institutional Assessment 2005 Scores (min = 1, max = 6) Albania3 Angola2.5 Bhutan4.5 Cambodia2.5 Cameroon4 Gambia3 Haiti2.5 Madagascar4 Mozambique3 Papua New Guinea1.5 Sierra Leone2.5 Sudan2.5 Tajikistan2.5 Uganda4 Vietnam3.5 Zimbabwe2.5 Source: World Bank, “Policies and Institutions for Environmental Sustainability.”

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 27 Growth and the Environment and Issues of Sustainability 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 32.3The Relationship Between Per-Capita GDP and Urban Air Pollution

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 27 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.

CHAPTER 32 Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 27 aggregate production function catch-up economic growth foreign direct investment (FDI) innovation Invention labor productivity modern economic growth productivity of an input REVIEW TERMS AND CONCEPTS