1. GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS Chapter 9

2. 8-2 Fundamental Economic Goals Long-run – Focus is on how to increase potential output. Resource use Technology – Say’s Law: Supply creates its own demand Related to Expenditure and Income approaches to GDP Short-run – Potential output is considered to be fixed – Focus is on how to get the economy operating at its potential.

3. 8-3 Growth Rates and Living Standards The Growth rate makes a huge difference in the long-run – Compounding – Rule of 72 – # years to double= 72/ growth rate. If China’s per capita income of $2000 grows 9% per year and the U.S. per capita income of $40,000 grows 1% per year – Time to double U.S. every 72 years China every 8 years – By 2055 U.S. per capita income about $65,000 China per capita income about $65,000

4. 8-4 Effects of Growth Price in minutes of work 050100150200 1919 Milk (½ gallon) Beef (1 pound) Eggs (1 dozen) Bread (1 pound) Chicken (3 lb. fryer) 2009 Beef (1 pound) Eggs (1 dozen) Bread (1 pound) Chicken (3 lb. fryer) Milk (½ gallon)

5. 8-5 Growth and Income Distribution A rising tide raises all ships Absolute vs. relative standards of living Is per capita income the right measure? – Means vs. medians – Income shares

6. 8-6 Sources of Growth Specialization of Labor Growth-compatible institutions Investment and capital accumulation Available resources Technology Entrepreneurship

7. Specialization of Labor The economics of pins Modern mass production

8. 8-8 Growth-Compatible Institutions Markets – Information Private ownership of property – The importance of incentives – The importance of limited liability--corporations The legal system – Fairness – Stability – Efficiency

9. 8-9 Investment and Accumulated Capital A key element in growth Capital must be productive Capital is much more than machines. It includes: – Human capital – skills that workers gain from experience, education, and on-the-job training. – Social capital – the habitual way of doing things that guides people in how they approach production.

10. 8-10 Available Resources The U.S. advantage Sustainability of resource use

11. 8-11 Technology and Entrepreneurship Waves of technology – Industrialization – Railroads – Telecommunications – Air transportation – Computers – Bio-technology Impact of entrepreneurs – Watt – Whitney – Ford – Gates – Gore

12. 8-12 Sources of Real U.S. Growth, 1928- 2007 Human capital (13%) Physical capital (19%) Technology (35%) Labor (33%)

13. 8-13 The Production Function Production function shows the relationship between inputs and outputs. Output = f(labor, capital, land) Growth is shown by a shift in the production function. Q2 Q1 L1

14. The Economics of Gloom THOMAS MALTHUS

15. 8-15 Diminishing Marginal Productivity and Population Growth Output Labor Subsistence level of output per worker Production function Q1 Q2 L1 L*

16. 8-16 Diminishing Marginal Productivity and Technology/Capital Predictions of long-term catastrophe were wrong – Increases in technology and capital overwhelmed diminishing marginal productivity of labor. Can it continue in a world of scarce natural resources?

17. 8-17 Economic Policies to Encourage Growth Encouraging saving and investment. Formalizing property rights and reducing bureaucracy and corruption. Providing more of the right kind of education. Promoting policies that encourage technological innovation. Promoting policies that allow taking advantage of specialization.

18. 8-18 The Convergence Hypothesis Convergence hypothesis – per capita income in countries with similar institutional structures will converge Because: – Costs of production are lower in other countries – Investment will flow to those countries Consequently: – U.S. growth will slow and growth rates in other countries will increase

19. 8-19 The Convergence Hypothesis As of the early 2000s the predictions of convergence have not come true. Because: – Lack of factor mobility – Differing institutional structure – Incomparable factors of production – Technological agglomeration effects – Learning by doing