1. Copyright 2008 The McGraw-Hill Companies 16-1 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show 16 Economic Growth

2. Copyright 2008 The McGraw-Hill Companies 16-2 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Chapter Objectives The General Ingredients of Economic Growth and How They Relate to Production Possibilities Analysis and Long-Run Aggregate Supply “Growth Accounting” and the Specific Sources of U.S. Economic Growth Why U.S. Productivity Growth Has Accelerated Since the Mid-1990s Differing Perspectives on Whether Growth is Desirable and Sustainable

3. Copyright 2008 The McGraw-Hill Companies 16-3 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Ingredients of Growth Supply Factors –Increases in Quantity and Quality of Natural Resources –Increases in Quality and Quantity of Human Resources –Increases in the Supply (or Stock) of Capital Goods –Improvements in Technology

4. Copyright 2008 The McGraw-Hill Companies 16-4 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Ingredients of Growth Demand Factor –Households, Businesses, And Government Must Purchase the Economy’s Expanding Output of Goods and Services Efficiency Factor –Must Achieve Economic Efficiency and Full Employment

5. Copyright 2008 The McGraw-Hill Companies 16-5 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Production Possibilities Consumer Goods Capital Goods a Economic Growth b Production Possibilities Curve From Chapter 1 A C BD c

6. Copyright 2008 The McGraw-Hill Companies 16-6 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Labor and Productivity Labor Productivity Size of Employed Labor Force Average Hours of Work Labor Inputs (Hours of Work) Technological Advance Quantity of Capital Education and Training Allocative Efficiency Other Labor Productivity (Average Output per Hour) Real GDP Real GDP = Hours of Work x Labor Productivity W 16.1

7. Copyright 2008 The McGraw-Hill Companies 16-7 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Growth in the AD-AS Model Production Possibilities and Aggregate Supply Consumer Goods Capital Goods A C BD Price Level Real GDP AS LR1 AS LR2

8. Copyright 2008 The McGraw-Hill Companies 16-8 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Growth in the AD-AS Model Production Possibilities and Aggregate Supply Price Level Real GDP AS LR1 AS LR2 AD 1 AD 2 AS 1 AS 2 Q1Q1 Q2Q2 P1P1 P2P2 Depicting U.S. Growth with AD-AS Model

9. Copyright 2008 The McGraw-Hill Companies 16-9 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Accounting for Growth Growth Accounting U.S. Economic Growth Rates U.S. Economic Growth, Annual Averages for Five Decades Year Average Annual Increase (Percent) Real GDP Real GDP Per Capita Source: Bureau of Economic Analysis O 16.1

10. Copyright 2008 The McGraw-Hill Companies 16-10 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Accounting for Growth Factors Underlying Growth –Increases in Hours of Work –Increases in Labor Productivity Accounting for Growth of U.S. Real GDP, 1953-2011 (Annual Percentage Changes) Item 1953 Q2 to 1973 Q4 to 1995 Q2 to 2001 Q1 to 2005 Q3 to 2011 Q4* Increases in Real GDP Increases in Quantity of Labor Increases in Labor Productivity 3.6 1.2 2.4 2.8 1.5 1.3 3.8 1.7 2.1 2.8 -0.6 3.4 3.2 0.8 2.4 Source: Economic Report of the President, 2006 *Beyond 2005 are Projections

11. Copyright 2008 The McGraw-Hill Companies 16-11 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Accounting for Growth Technological Advance Quantity of Capital –Infrastructure Education and Training –Human Capital Changes in the Educational Attainment of the U.S. Adult Population Percent of Adult Population Year Source: U.S. Census Bureau

12. Copyright 2008 The McGraw-Hill Companies 16-12 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show GLOBAL PERSPECTIVE Accounting for Growth Average Test Scores of Eighth Students In Math and Science, Top 10 Countries and the United States Singapore South Korea Hong Kong Taiwan Japan Belgium Netherlands Estonia Hungary Malaysia United States 1 2 3 4 5 6 7 8 9 10 15 605 589 586 585 570 537 536 531 529 508 504 Singapore Taiwan South Korea Hong Kong Estonia Japan Hungary Netherlands United States Australia 1 2 3 4 5 6 7 8 9 10 578 571 558 556 552 543 536 527 Mathematics Science

13. Copyright 2008 The McGraw-Hill Companies 16-13 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Accounting for Growth Economies of Scale Improved Resource Allocation Other Factors –Economic Freedom –Political Freedom –“Growth Friendly” –Positive Attitudes Toward Work and Risk Taking

14. Copyright 2008 The McGraw-Hill Companies 16-14 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show A New Economy? Productivity Acceleration –1.4% Average Growth 1973- 1995 –2.9% Average Growth 1995- 2004 Reasons for Acceleration –The Microchip and Information Technology –New Firms and Increasing Returns Start-Up Firms

15. Copyright 2008 The McGraw-Hill Companies 16-15 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show A New Economy? Increasing Returns –More Specialized Inputs –Spreading of Development Costs –Simultaneous Consumption –Network Effects –Learning by Doing Global Competition

16. Copyright 2008 The McGraw-Hill Companies 16-16 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show A New Economy? Implication: More Rapid Growth Skepticism About Permanence What Can We Conclude? –More Rapid Long-Run Trend of Productivity Growth –Time Will Tell If Growth is Sustainable

17. Copyright 2008 The McGraw-Hill Companies 16-17 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show A New Economy? Growth Competitiveness Index Finland United States Sweden Denmark Taiwan Singapore Iceland Switzerland Norway Australia 1 2 3 4 5 6 7 8 9 10 CountryRanking GLOBAL PERSPECTIVE Source: World Economic Forum

18. Copyright 2008 The McGraw-Hill Companies 16-18 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Growth Desirability Is Growth Desirable and Sustainable? The Antigrowth View –Adverse Spillovers –Alternative Quality of Life Opinions In Defense of Economic Growth –Higher Standard of Living –Poverty Reduction –Limited Only by Human Imagination

19. Copyright 2008 The McGraw-Hill Companies 16-19 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Last Word Economic Growth in China Nearly 9% Growth Rate Over the Past 25 Years Growth in Capital Goods Boosts Productivity, Output, and Income More Foreign Investment Per Capita Income Increasing at 8% Shifts to Higher Productivity Employment Shift from State Owned Enterprises to Private

20. Copyright 2008 The McGraw-Hill Companies 16-20 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Last Word Economic Growth in China Huge Expansion of Trade Some Periods of Inflation Unemployment from State Owned Activities is Significant WTO 2001 Participation Supports Copyright and Intellectual Property Protections Wide Income Disparity Throughout China Incomes are Low But Rapidly Changing

21. Copyright 2008 The McGraw-Hill Companies 16-21 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Key Terms economic growtheconomic growth supply factors demand factor efficiency factor labor productivitylabor productivity labor-force participation ratelabor-force participation rate growth accountinggrowth accounting infrastructure human capital economies of scaleeconomies of scale New economy information technologyinformation technology start-up firms increasing returnsincreasing returns network effects learning by doinglearning by doing

22. Copyright 2008 The McGraw-Hill Companies 16-22 Ingredients of Growth Production Possibilities Labor and Productivity Growth in the AD-AS Model Accounting for Growth A New Economy Growth Desirability Last Word Key Terms End Show Next Chapter Preview… Disputes over Macro Theory And Policy