Case Econ08 Ab - Az.ppt 31

Chapter
31
Long-Run Growth
Prepared by:
Fernando & Yvonn Quijano
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Long-Run Growth
31
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–2005 II
Economic Growth and Public Policy
Suggested Public Policies
Growth Policy: A Long-Run
Proposition
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The Pros and Cons of Growth

The Progrowth Argument
The Antigrowth Argument
Summary: No Right Answer
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 26
LONG-RUN GROWTH
economic growth An increase in the

total output of an economy. Defined by
some economists as an increase of
real GDP per capita.
modern economic growth The period

of rapid and sustained increase in real
output per capita that began in the
Western world with the Industrial
Revolution.
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THE GROWTH PROCESS: FROM
AGRICULTURE TO INDUSTRY
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FIGURE 18.1 Economic Growth Shifts Society’s Production

Possibility Frontier Up and to the Right
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.
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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.
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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:
1. An increase in the labor supply
2. An increase in physical or human capital
3. An increase in productivity (the amount of product produced by each unit of capital or

labor)
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AN INCREASE IN LABOR SUPPLY

TABLE 18.1 Economic Growth from an Increase in Labor—More Output but Diminishing
Returns and Lower Labor Productivity
QUANTITY QUANTITY TOTAL MEASURED
OF LABOR OF CAPITAL OUTPUT LABOR
L K Y PRODUCTIVITY
PERIOD (HOURS) (UNITS) (UNITS) Y/L
1 100 100 300 3.0

2 110 100 320 2.9
3 120 100 339 2.8
4 130 100 357 2.7
labor productivity Output per worker hour;

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the amount of output produced by an

average worker in 1 hour.
TABLE 18.2 Employment, Labor Force, and Population Growth, 1947–2004

CIVILIAN CIVILIAN
NONINSTITUTIONAL LABOR
POPULATION FORCE
OVER 16 YEARS OLD Number Percentage EMPLOYMENT
(MILLIONS) (Millions) of Population (MILLIONS)
1947 101.8 59.4 58.3 57.0

1960 117.3 69.6 59.3 65.8
1970 137.1 82.8 60.4 78.7
1980 167.7 106.9 63.7 99.3
1990 189.2 125.8 66.5 118.8
2000 212.6 142.6 67.1 136.9
2004 223.4 147.4 66.0 139.3
Percentage change, 1947 – 2004 + 119.4% + 148.1% + 144.4%
Annual rate + 1.4% +1.6% + 1.6%
Source: Economic Report of the President, 2005, Table B-35.

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As long as the economy and the capital stock are expanding rapidly enough, new entrants
into the labor force do not displace other workers.
INCREASES IN PHYSICAL CAPITAL

TABLE 18.3 Economic Growth from an Increase in Capital—More Output, Diminishing
Returns to Added Capital, Higher Measured Labor Productivity
QUANTITY QUANTITY TOTAL MEASURED
OF LABOR OF CAPITAL OUTPUT LABOR
L K Y PRODUCTIVITY
PERIOD (HOURS) (UNITS) (UNITS) Y/L
1 100 100 300 3.0

2 100 110 310 3.1
3 100 120 319 3.2
4 100 130 327 3.3
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TABLE 18.4 Fixed Private Nonresidential Net Capital Stock, 1960–2003 (Billions of 2000
Dollars)
EQUIPMENT STRUCTURES
1960 645.7 2,273.3

1970 1,108.5 3,094.8
1980 1,910.0 4,047.7
1990 2,613.3 5,304.5
2000 4,138.5 6,287.6
2003 4,523.3 6,525.8
Percentage change, 1960 – 2003 +600.59% +187.1%
Annual rate +4.6% + 2.5%
Source: Survey of Current Business, September 2004, Table 15, p. 42 and author’s estimates.
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INCREASES IN HUMAN CAPITAL

TABLE 18.5 Years of School Completed by People Over 25 Years Old, 1940–2003
PERCENTAGE
WITH LESS PERCENTAGE PERCENTAGE
THAN 5 WITH 4 YEARS WITH 4 YEARS
YEARS OF OF HIGH SCHOOL OF COLLEGE
SCHOOL OR MORE 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 NA 84.1 25.6
2003 NA 84.6 27.2
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NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2005, Table 212.
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.
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Other Advances in Knowledge
In addition to managerial knowledge, improved

personnel management techniques, accounting
procedures, data management, and the like can
also make production more efficient, reduce
costs, and increase measured productivity.
Economies of Scale
External economies of scale are cost savings
that result from increases in the size of
industries.
Other Influences on Productivity

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GROWTH AND PRODUCTIVITY
IN THE UNITED STATES
TABLE 18.6 Growth of Real GDP in the United States, 1871–2000

AVERAGE AVERAGE
GROWTH GROWTH
RATE RATE
PERIOD PER YEAR PERIOD PER YEAR
1871-1889 5.5 1950-1960 3.5
1889-1909 4.0 1960-1970 4.2
1909-1929 2.8 1970-1980 3.2
1929-1940 1.6 1980-1990 3.2
1940-1950 5.6 1990-2000 3.2

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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.
TABLE 18.7 Growth of Real GDP in the United States and

Other Countries, 1986–2004
AVERAGE
GROWTH RATE
COUNTRY PER YEAR
United States 3.1
Japan 2.3
Germany 2.0
France 2.2
Italy 1.8
United Kingdom 2.7
Canada 2.8
Africa 2.8
Asia (excluding Japan) 9.1
India 5.8
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Source: Economic Report of the President, 2005, computed from Table B-112.
SOURCES OF GROWTH IN THE U.S. ECONOMY:
1929–1982
TABLE 18.8 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 14 3 16 29
Education (human capital) 19 20 15 18
Increases in productivity 47 51 55 6
Advances in knowledge 31 30 39 8
Other factorsa 16 21 16 −2
Annual growth rate 2.8 2.4 3.6 2.6
in real national
income
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Economies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
a
Source: Edward Denison, Trends in American Economic Growth, 1929–1982 (Washington: Brookings Institution, 1985). Reprinted with permission of
The Brookings Institution.
TABLE 18.9 Sources of U.S. Growth, 1973–2000
Percent Contribution
1973-1990 1990-1995 1995-2000
Increases in inputs 92 90 83
Labor 40 44 43
Capital 52 46 50
IT capital 14 20 24
Non-IT capital 38 26 26
Increases in productivity 9 10 17
Source: Dale Jorgenson and Kazuyuki Motohashi, “Economic Growth of Japan and the United States in the Information
Age,” Rieti Discussion Paper Series 3-E-015. Cited with the permission of the authors.
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LABOR PRODUCTIVITY: 1952 I–2003 II

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FIGURE 18.2 Output per Worker Hour (Productivity), 1952 I–2005 II
ECONOMIC GROWTH AND PUBLIC POLICY
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
Reduced Regulations
Industrial Policy
industrial policy Government
involvement in the allocation of capital
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across manufacturing sectors.

ECONOMIC GROWTH AND PUBLIC POLICY
GROWTH POLICY: A LONG-RUN PROPOSITION
The fact that progrowth policies can be costly in

the short run and do not produce measurable
results for a long time often pushes them far
down on politicians’ lists of priorities.
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THE PROS AND CONS OF GROWTH
THE PROGROWTH ARGUMENT
Advocates of growth believe that:
- Growth is progress.
- Capital accumulation and new technology
improve the quality of life.
- Growth saves the most valuable commodity—
time.
- Growth improves the quality of things that yield
satisfaction directly.
- Growth produces jobs and higher incomes.
With higher incomes we can better afford the
sacrifices needed to help the poor.
- When population growth is not accompanied by
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growth in output, unemployment and poverty

increase.
THE ANTIGROWTH ARGUMENT
Those who argue against economic growth generally

make the following four major points:
Growth Has Negative Effects on the Quality of Life
Growth Encourages the Creation of Artificial Needs
consumer sovereignty The notion that

people are free to choose, and that things
that people do not want will not sell. “The
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consumer rules.”
Growth Means the Rapid Depletion of a Finite

Quantity of Resources
Growth Requires an Unfair Income Distribution and

Propagates It
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SUMMARY: NO RIGHT ANSWER
Society must make some hard choices, and there

are many trade-offs.
As long as these trade-offs exist, people will

disagree. The debate in contemporary politics is
largely about the costs and benefits of shifting
more effort toward the goal of economic growth
and away from environmental and social welfare
goals.
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REVIEW TERMS AND CONCEPTS
aggregate production function

consumer sovereignty
economic growth
industrial policy
innovation
invention
labor productivity
modern economic growth
productivity of an input
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Chapter

Fernando & Yvonn Quijano

The Pros and Cons of Growth

economic growth An increase in the

modern economic growth The period

FIGURE 18.1 Economic Growth Shifts Society’s Production

From Agriculture to Industry: The Industrial

More could be produced with fewer resources,

A rural agrarian society was very quickly

Growth in Modern Society

Economic growth continues today, and while

Growth comes from a bigger workforce and

aggregate production function The

An increase in GDP can come about through:

1. An increase in the labor supply

2. An increase in physical or human capital

3. An increase in productivity (the amount of product produced by each unit of capital or

AN INCREASE IN LABOR SUPPLY

1 100 100 300 3.0

labor productivity Output per worker hour;

the amount of output produced by an

TABLE 18.2 Employment, Labor Force, and Population Growth, 1947–2004

1947 101.8 59.4 58.3 57.0

Source: Economic Report of the President, 2005, Table B-35.

INCREASES IN PHYSICAL CAPITAL

1 100 100 300 3.0

1960 645.7 2,273.3

INCREASES IN HUMAN CAPITAL

1940 13.7 24.5 4.6

productivity of an input The amount of

invention An advance in knowledge.

innovation The use of new knowledge

Other Advances in Knowledge

In addition to managerial knowledge, improved

Other Influences on Productivity

TABLE 18.6 Growth of Real GDP in the United States, 1871–2000

1871-1889 5.5 1950-1960 3.5

1889-1909 4.0 1960-1970 4.2

1909-1929 2.8 1970-1980 3.2

1929-1940 1.6 1980-1990 3.2

1940-1950 5.6 1990-2000 3.2

TABLE 18.7 Growth of Real GDP in the United States and

1929 – 1982 1929 – 1948 1948 – 1973 1973 – 1979

TABLE 18.9 Sources of U.S. Growth, 1973–2000

LABOR PRODUCTIVITY: 1952 I–2003 II

FIGURE 18.2 Output per Worker Hour (Productivity), 1952 I–2005 II

Policies to Increase the Saving Rate

Policies to Stimulate Investment

Policies to Increase Research and Development

across manufacturing sectors.

GROWTH POLICY: A LONG-RUN PROPOSITION

The fact that progrowth policies can be costly in

Advocates of growth believe that:

growth in output, unemployment and poverty

Those who argue against economic growth generally

Growth Has Negative Effects on the Quality of Life

Growth Encourages the Creation of Artificial Needs

consumer sovereignty The notion that

Growth Means the Rapid Depletion of a Finite

Growth Requires an Unfair Income Distribution and

Society must make some hard choices, and there

As long as these trade-offs exist, people will