2. Productivity is measured by:

3. Real GDP Millions of Workers 0 100120 $7 Trillion $8 Trillion Employment and Labor Productivity A B Slope = productivity = $70,000 Slope = productivity = $66,666 Productivity is given by the slope of a line from the origin to a point on the production function

4. Real GDP Millions of Workers 0 100120 $7 Trillion $8 Trillion Shifts of the Aggregate Production Function 1.Increase in the stock of human capital 2.Increase in the stock of physical capital 3.Technical change A B productivity = $70,000 productivity = $80,000 H

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

6. Education and Training All other goods 0 A B Providing resources for education and training entails a short- run trade-off.

7. Net investment raises the capital to labor ratio, ceteris paribus. This boosts productivity 0Employment (millions) Real GDP ($ Trillions)

8. Capital goods All other goods 0 A B But production of capital goods involves trade-offs too

9. Increase incentives to invest 1.Reduced corporate profit taxes. 2.Investment tax credits Increase incentives to save: 1.Reduce taxes on capital gains. 2.Tax consumption Government Deficit Reduction

10. Interest Rate Funds ($ Trillions) 0 An Increase in Investment Demand I 1 = Original Demand for Funds I 2 = New Demand for Funds 3% 5% 1.51.752.25

11. Interest Rate Funds ($ Trillions) 0 An Increase in Saving 1.752.252.5 Investment Spending 3% 5% S 1 = Original Supply of Funds S 2 = New Supply of Funds B F C

12. Interest Rate Funds ($ Trillions) 0 Reduction of the Government Deficit Investment Spending + Deficit Investment Spending Deficit is reduced from $.75 trillion to zero 1.01.51.75 Supply of Funds (Saving) 5% 3% E A B

13. Robert Solow. “Technical Change and the Aggregate Production Function, 1919-1954,” Review of Economics and Statistics, November 1957. 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

14. 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

15. Average Productivity Growth PeriodPer Year (Percent) 1955-19712.838 1972-19951.665 1996-20052.957 Source: Bureau of Labor StatisticsBureau of Labor Statistics Productivity Growth in the USA

16. Economists refer to the 1972-95 period as “the big slowdown”

18. 1.Tax credits to provide incentives for private research and development 2.Give incentives to the pursuit of careers in science and engineering 3.Public funding of R & D 4.Legal protections of intellectual property rights— e.g., issuance of patents.

19. Research and Development All other goods 0 A B R & D absorbs scarce resources