1. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010- 2011 6 CHAPTER Productivity and Growth Macro

2. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Labor Productivity  Labor –70% of production costs –Easily measured –Available statistics  Labor productivity –Increases with Human and physical capital per worker

3. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Per-Worker Production Function  Relationship Capital per worker Output per worker  Per-worker production function Upward sloping Diminishing slope Diminishing marginal returns from capital  Increased productivity More capital per worker Movement along PF

4. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Per-Worker Production Function PF Output per worker y Capital per worker0k The per-worker production function, PF, shows a direct relationship between the amount of capital per worker, k, and the output per worker, y. The bowed shape of PF reflects the law of diminishing marginal returns from capital: As more capital is added to a given number of workers, output per worker increases but at a diminishing rate and eventually could turn negative. Exhibit 2

5. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Impact of a Technological Breakthrough on the Per-Worker Production Function A technological breakthrough increases output per worker at each level of capital per worker. Better technology makes workers more productive. This is shown by an upward rotation of the per-worker production function from PF to PF’. An improvement in rules of the game would have a similar effect. Exhibit 3 PF Capital per worker0k PF’ Output per worker y y’y’

6. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 2 Productivity and Growth in Practice  Industrial market economies –Higher standard of living –15% of world population –Produce 75% of world’s output  Developing countries –Poor countries –Low standard of living –Less human and physical capital –Low labor productivity

7. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 2 Percent of Adult Population with at Least a College Education: 2003 and 2006 Exhibit 4

8. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 2 Long-Term Trend in U.S. Labor Productivity Growth: Annual Average by Decade Exhibit 5

9. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 2 Output per Capita  Standard of living –Output per capita –Real GDP per capita  US –General upward trend –During recessions Decrease in productivity

10. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved U.S. Real GDP per Capita Has Nearly Tripled Since 1959 LO 2 Exhibit 7

11. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved U.S. GDP per Capita Is Highest of Major Economies LO 2 Exhibit 8

12. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved U.S. Real GDP per Capita Outgrew That of Most Other Major Economies Since 1982 LO 2 Exhibit 9

13. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Technological Change and Unemployment  Technological change  Job dislocations  Displaced workers  More affordable products  Higher demand  Increased employment and production  “Does technological change lead to unemployment?”  No statistical evidence LO 3

14. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Research and Development  Basic research  General search for knowledge  First step for technological advancement  Yields a higher return to society  Applied research  Answer particular questions  Develop specific products LO 3

15. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Industrial Policy  Industrial policy  Government  Use taxes, subsidies, regulations, coordination  Nurture technologies  Protect domestic industries  Concerns  Government’s efficiency  Giveaway programs LO 3

16. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Do Economies Converge?  Convergence theory  Developing countries  Can grow faster than advanced ones  Should eventually close the gap  Explanations  Adopt existing technologies  Invest in human resources LO 3

17. Chapter 6Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Do Economies Converge?  Evidence  Few poor countries are closing the gap  Others  Slow growth  Lower relative standard of living  Trapped  Explanations  High birthrates; Difference in human capital  Unstable economic environment  No institutions; Bad infrastructures; Civil war LO 3