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

3. Long-Run Growth
Prepared by:
Fernando & Yvonn Quijano

4. 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

5. 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.

6. The Growth Process: From Agriculture to Industry
 FIGURE 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.

7. 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.

8. 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.

9. Average Growth Rate Per Year, 1999-2007
The Growth Process: From Agriculture to Industry
Growth Patterns and the Possibility of Catch-Up
TABLE Growth of Real GDP:
Country
Average Growth Rate Per Year,
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 ( )
3.9
Cameroon ( )
4.0
Zimbabwe ( )
1.0
Source: Economic Report of the President, 2008.

10. 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.

11. 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).

12. 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 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

13. The Sources of Economic Growth
An Increase in Labor Supply
TABLE 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.

14. The Sources of Economic Growth
Increases in Physical Capital
TABLE 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

15. The Sources of Economic Growth
Increases in Physical Capital
TABLE 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.

16. 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.

17. The Sources of Economic Growth
Increases in Human Capital
TABLE 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.

18. 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.

19. 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.

20. Average Growth Rate Per Year
Growth and Productivity in the United States
TABLE Growth of Real GDP in the United States, 1871–2000
Period
Average Growth Rate Per Year
5.5
3.5
4.0
4.2
2.8
3.2
1.6
5.6
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.

21. Percent Of Growth Attributable To Each Source
Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE 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.

22. Percent Contribution 1995-2004
Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE Sources of U.S. Growth,
Percent Contribution
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.

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

24. 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

25. 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.

26. 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)
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.”

27. 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.

28. 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.

29. 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