1. Productivity and growth
Productivity is measured by:

2. Employment and Labor Productivity Real GDP
Slope = productivity = $66,666
Slope = productivity = $70,000
Productivity is given by the slope of a line from the origin to a point on the production function
$8 Trillion B A
$7 Trillion
100
120
Millions of Workers

3. Shifts of the Aggregate Production Function
Increase in the stock of human capital
Increase in the stock of physical capital
Technical change
Real GDP
productivity = $80,000 H
$8 Trillion B
$7 Trillion A
productivity = $70,000
100
120
Millions of Workers

4. Enlarging the stock of human capital means allocating scarce resources for education and training. There is an opportunity cost for both individuals and society.

5. Providing resources for education and training entails a short-run trade-off.B
All other goods
Education and Training

6. Net investment raises the capital to labor ratio, ceteris paribus
Net investment raises the capital to labor ratio, ceteris paribus. This boosts productivity
Real GDP ($ Trillions)
Employment (millions)

7. But production of capital goods involves trade-offs too
All other goods
Capital goods

8. Policies to stimulate investment
Increase incentives to invest
Reduced corporate profit taxes.
Investment tax credits
Increase incentives to save:
Reduce taxes on capital gains.
Tax consumption
Government Deficit Reduction

9. An Increase in Investment Demand Interest Rate5% 3%
I2 = New Demand for Funds
I1 = Original Demand for Funds
1.5
1.75
2.25
Funds ($ Trillions)

10. An Increase in Saving Interest Rate B F 5% C 3% Investment Spending
S1 = Original Supply of Funds
S2 = New Supply of Funds B F 5% C 3%
Investment Spending
1.75
2.25
2.5
Funds ($ Trillions)

11. Reduction of the Government Deficit Interest Rate
Supply of Funds (Saving)
Deficit is reduced from $.75 trillion to zero E A 5% B 3%
Investment Spending + Deficit
Investment Spending
1.0
1.5
1.75
Funds ($ Trillions)

12. Professor Solow has claimed that about 2/3 of the growth of real GDP per head in the the U.S. can be explained by technical innovation
Robert Solow. “Technical Change and the Aggregate Production Function, ,” Review of Economics and Statistics, November 1957.

13. Productivity boosting innovations
Steam engine
Electrification
The assembly line
Continuous process manufacturing
The telephone
Internal combustion engine
Air conditioning
Cotton harvester
The transistor
The computer
Electronic data interchange
Robotics
Genetically-modified seeds
Internet browser software

14. Source:

15. Policies to Stimulate Innovation
Tax credits to provide incentives for private research and development
Give incentives to the pursuit of careers in science and engineering
Public funding of R & D
Legal protections of intellectual property rights—e.g., issuance of patents.

16. R & D absorbs scarce resources
All other goods
Research and Development