Principles of macroeconomics 10e by case fair oster ch17

PRINCIPLES OF

MACROECONOMICS

PART IV Further Macroeconomics Issues

TENTH

EDITION

CASE FAIR OSTER

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Prepared by: Fernando Quijano & Shelly
1 ofTefft
28


PART IV Further Macroeconomics Issues
© 2012 Pearson Education, Inc. Publishing as Prentice Hall

2 of 28


Long-Run Growth

17
CHAPTER OUTLINE
The Growth Process: From Agriculture to Industry
Sources of Economic Growth

PART IV Further Macroeconomics Issues

Increase in Labor Supply
Increase in Physical Capital
Increase in the Quality of the Labor Supply (Human Capital)
Increase in the Quality of Capital (Embodied Technical
Change)
Disembodied Technical Change
More on Technical Change
U.S. Labor Productivity: 1952 I–2010 I

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Growth and the Environment and Issues of
Sustainability

3 of 28


output growth The growth rate of the
output of the entire economy.

PART IV Further Macroeconomics Issues

per-capita output growth The growth
rate of output per person in the economy.

labor productivity growth The growth
rate of output per worker.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

4 of 28


The Growth Process: From Agriculture to Industry
 FIGURE 17.1 Economic Growth Shifts
Society’s Production Possibility Frontier
Up and To the Right

PART IV Further Macroeconomics Issues

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.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

5 of 28


The Growth Process: From Agriculture to Industry
Beginning in England around 1750, technical change and capital accumulation
increased productivity significantly in two important industries: agriculture and

textiles.
New inventions and new machinery meant that more could be produced with
fewer resources.
Growth meant new products, more output, and wider choice.

PART IV Further Macroeconomics Issues

A rural agrarian society was quickly transformed into an urban industrial society.
Economic growth continues today in the developed world, 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 (physical capital); a better-educated and
more highly skilled workforce (human capital); and increasingly from innovation,
technical change, and newly developed products and services.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

6 of 28


PART IV Further Macroeconomics Issues

Among the sources of increased productivity and growth in England
around 1750 was:
a.
Technical change and capital accumulation.
b.
New and more efficient methods of farming.
c.
New inventions and new machinery.

d.
All of the above.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

7 of 28


PART IV Further Macroeconomics Issues

Among the sources of increased productivity and growth in England
around 1750 was:
a.
Technical change and capital accumulation.
b.
New and more efficient methods of farming.
c.
New inventions and new machinery.
d.
All of the above.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

8 of 28


The Growth Process: From Agriculture to Industry
TABLE 17.1 Growth of Real GDP: 1991–2007

PART IV Further Macroeconomics Issues

Country

Average Growth Rates per Year,
percentage points, 1991-2007

United States

3.0

Japan

1.3

Germany

1.7

France

1.9

United Kingdom

2.5

China

10.4

India

6.3

Africa

3.8

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.
This idea that gaps in national incomes tend to close over time is called
convergence theory.
An economic historian coined the term the advantages of backwardness over
50 years ago to describe the phenomenon of less developed countries leaping
ahead by borrowing technology from more developed countries.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

9 of 28


Sources of Economic Growth

aggregate production function A mathematical relationship
stating that total GDP (output) depends on the total amount of
labor used and the total amount of capital used.

PART IV Further Macroeconomics Issues

The numbers that are used in Tables 17.2 and 17.4 that follow are based on the
simple production function
Y = 3 × K1/3L2/3.

Both capital and labor are needed for production and increases in either result
in more output.
Using this construct we can now explore exactly how an economy achieves
higher output levels over time as it experiences changes in labor and capital.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

10 of 28


Sources of Economic Growth
Increase in Labor Supply

PART IV Further Macroeconomics Issues

TABLE 17.2 Economic Growth from an Increase in Labor—More Output but
Diminishing Returns and Lower Labor Productivity

Period

Quantity
of Labor
L

Quantity
of Capital

K

Total
Output
Y

Labor
Productivity
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

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

11 of 28


Sources of Economic Growth
Increase in Labor Supply
TABLE 17.3 Employment, Labor Force, and Population Growth, 1960–2008

PART IV Further Macroeconomics Issues

Civilian
Noninstitutional
Population
16 and Over
(Millions)
1960
1970
1980
1990
2000
2008
Percentage change, 1960–2008
Annual rate

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

117.3
137.1
167.7
189.2
212.6
233.8
+99.3%
+1.4%

Civilian
Labor
Force
Number

Percentage Employment
(Millions) of Population (Millions)
69.6
82.8
106.9
125.8
142.6
154.3
+126.7%
+1.6%

59.3
60.4
63.7
66.5
67.1
66.0

65.8
78.7
99.3
118.8
136.9
145.4
+121.0%
+1.6%

12 of 28

PART IV Further Macroeconomics Issues

In order for economic growth to increase the standard of living:
a.
The rate of output growth must exceed the rate of population
increase.
b.
Income must be distributed equally.
c.
The government must practice industrial policy.
d.
Citizens must experience improvements in the quality of life.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

13 of 28


PART IV Further Macroeconomics Issues

In order for economic growth to increase the standard of living:
a.
The rate of output growth must exceed the rate of population
increase.
b.
Income must be distributed equally.
c.
The government must practice industrial policy.
d.
Citizens must experience improvements in the quality of life.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

14 of 28


Sources of Economic Growth
Increase in Physical Capital

PART IV Further Macroeconomics Issues

TABLE 17.4 Economic Growth from an Increase in Capital—More Output, Diminishing
Returns to Added Capital, Higher Labor Productivity
Output
per Capital
Y/K

Period

Quantity
of Labor
L

Quantity
of Capital
K

Total
Output
Y

Labor
Productivity
Y/L

1

100

100

300

3.0

3.0

2

100

110

310

3.1

2.8

3

100

120

319

3.2

2.7

4

100

130

327

3.3

2.5

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

15 of 28


Sources of Economic Growth
Increase in Physical Capital

TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2008
(Billions of 2005 Dollars)

PART IV Further Macroeconomics Issues

Equipment

Structures

1960

666.8

2,860.1

1970

1,146.8

3,951.8

1980

1,919.6

5,216.8

1990

2,603.8

6,908.4

2000

4,204.1

8,162.1

2008

5,400.0

9,266.5

Percentage change, 1960–2008

+709.8%

+224.0%

+4.4%

+ 2.4%

Annual rate

foreign direct investment (FDI) Investment in enterprises
made in a country by residents outside that country.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

16 of 28


Sources of Economic Growth
Increase in the Quality of the Labor Supply (Human Capital)

PART IV Further Macroeconomics Issues

TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2008

1940
1950
1960
1970
1980
1990
2000
2008

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

13.7
11.1
8.3
5.5
3.6
NA
NA
NA

24.5
34.3
41.1
52.3
66.5
77.6
84.1
86.6

4.6
6.2
7.7
10.7
16.2
21.3
25.6
29.4

NA = not available.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

17 of 28


PART IV Further Macroeconomics Issues

An increase in GDP can come about through:
a.
An increase in the labor supply.
b.
An increase in physical or human capital.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d.
All of the above.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

18 of 28


PART IV Further Macroeconomics Issues

An increase in GDP can come about through:
a.
An increase in the labor supply.

b.
An increase in physical or human capital.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d. All of the above.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

19 of 28


E C O N O M I C S I N PRACTI C E
Education and Skills in the United Kingdom

PART IV Further Macroeconomics Issues

In discussions of using
education and health care
to boost labor productivity,
the context is often the
developing economies,
where the overall level of
health and education are
low.
Developed economies like
the United Kingdom are
also concerned about the
skill level of their labor
force as they contemplate their productivity and growth rates.

U.K. Businesses Press for Focus on Skills
The Wall Street Journal

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

20 of 28


Sources of Economic Growth
Increase in the Quality of Capital (Embodied Technical Change)
embodied technical change Technical change that
results in an improvement in the quality of capital.
Disembodied Technical Change

PART IV Further Macroeconomics Issues

disembodied technical change Technical change that
results in a change in the production process.
More on Technical 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.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

21 of 28


Sources of Economic Growth

PART IV Further Macroeconomics Issues

U.S. Labor Productivity: 1952 I–2010 I

 FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2010 I

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

22 of 28


PART IV Further Macroeconomics Issues

The accumulation of capital in an economy is ultimately constrained by:
a.
The rate of saving.
b.
The rate of spending relative to income growth.
c.
Depreciation.
d.
Government spending and taxation.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

23 of 28


PART IV Further Macroeconomics Issues

The accumulation of capital in an economy is ultimately constrained by:
a.
The rate of saving.
b.
The rate of spending relative to income growth.
c.
Depreciation.
d.
Government spending and taxation.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

24 of 28


Growth and the Environment and Issues of Sustainability
TABLE 17.7

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

2.5

Cameroon

4

Gambia

3

PART IV Further Macroeconomics Issues

Haiti

2.5

Madagascar

4

Mozambique

3

Papua New Guinea

1.5

Sierra Leone

2.5

Sudan

2.5

Tajikistan

2.5

Uganda

4

Vietnam

3.5

Zimbabwe

2.5

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

25 of 28