McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Growth and Productivity:...

McGraw-Hill/Irwin

©2008 The McGraw-Hill Companies, All Rights Reserved

Growth and Productivity: Long-Run Possibilities


Chapter 17Chapter 17

2

The Nature of Growth

There are two distinct ways in which output increases.

Increased use of existing productive resources.

Expansion of productive capacity.

LO1

3

Short-Run Changes in Capacity Utilization

The easiest kind of growth comes from increased use of our existing productive capabilities.

An economy moves to a point on the production-possibilities curve when it uses all of its resources.

LO1

4

Long-Run Changes in Capacity

To achieve large and lasting increases in output, we must push our production possibilities outward.

LO1

5

Long-Run Changes in Capacity

Economic growth implies a rightward shift of the long-run aggregate supply curve.

Economic growth is an increase in output (real GDP) – an expansion of production possibilities.

LO1

6

Consumption Goods

Inve

stm

ent G

ood

s

Consumption Goods

Inve

stm

ent G

ood

s

0 0

Two Types of Growth

A

B

THE SHORT RUN:increased capacity utilization

B

A

C

THE LONG RUN:expanded capacity

LO1

7

Real Output (dollars per year)

Pri

ce L

eve

l (av

era

ge p

rice

) Shifts in Long-Run Supply

AD2

LRAS2

AD1

LRAS1

AS

E1

E2 E3

LO1

8

Nominal vs. Real GDP

Economic growth is referred to in terms of real GDP, not nominal GDP.

Real GDP – The value of final output produced in a given period, adjusted for changing prices.

9

Nominal vs. Real GDP

By using base period prices, growth is measured in real goods and services, not inflation distorted dollars.

Base period – The time period used for comparative analysis; the basis of indexing (e.g., of price changes).

10

Measures of Growth

Changes in real GDP are presented in percentage terms as a growth rate.

11

The Growth Rate

Growth rate is the percentage change in real output from one period to another.

It is calculated as the change in real output between two periods divided by the total output in the base year.

12

Recent U.S. Growth Rates

13

The Exponential Process

The growth of the economy is an exponential process.

Small economic growth compounds from year to year.

14

GDP per Capita: A Measure of Living Standards

Growth in GDP per capita is attained only when the growth of output exceeds population growth.

GDP per capita – Total GDP divided by total population: average GDP.

15

GDP per Worker: A Measure of Productivity

GDP per capita rises when the labor force grows faster than the population.

Labor Force – All persons over age 16 who are either working for pay or actively seeking paid employment.

16


The employment rate cannot rise forever.

Employment rate – The percentage of the adult population that is employed.

17


Increases in GDP per capita can also come from increases in output per worker.Productivity is measured as output per unit of input, e.g., output per labor-hour.

18

A Rising Employment Rate

19

The Productivity Turnabout

For economic growth to continue, the productivity of the average U.S. worker must rise still further.

From 1973 to 1995 productivity grew at an average rate of 1.4 percent.

Jumping to 2.6 percent, productivity grew more rapidly after 1995.

20

Productivity Gains

Output per Hour in the Nonfarm Business Sector

100

110

120

90

80

701973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Actual

1.4 percent average annual growth 1973 to 1995

2.6 percent average annual growth 1995 to 2000

Inde

x, 1

992

= 1

00

21

Source of Growth

Future growth depends on two factors:

Growth rate of the labor force.

Growth rate of productivity.

Growth rate of

productivity

Growth rate of labor force

Growth rate of

total output

LO1

22

Source of Growth

The sources of productivity gains include:

Higher skills - an increase in labor skills.More capital - an increase in the ratio of capital to labor.Technological advances - the development and use of better capital equipment and products.Improved management - better use of available resources in the production process.

LO1

23

Human-Capital Investment

Education and skills training have greatly increased the quality of U.S. labor.

The gains in productivity reflect greater human capital investment.

Human capital is the knowledge and skills possessed by the labor force.

LO1

24

Physical-Capital Investment

A primary determinant of labor productivity is the rate of capital investment.

LO1

25

Comparative Investment and Growth

LO1

26

Saving and Investment Rates

Savings are not just a form of leakage, but a basic source of investment financing.

There must be enough saving to at least finance net investment.

Net investment is gross investment less depreciation.

LO1

27

U.S. Workers Compete Well

LO1

28

Household and Business Saving

Household saving rates in the U.S. are notoriously low.

Virtually all U.S. investment has been financed with business saving and foreign investment.

LO1

29

Foreign Investment

Foreign investors have poured money into U.S. plant, equipment, software, and financial needs.

LO1

30

Management Training

Investments in managerial talent are another source of economic growth.

U.S. corporations spend billions of dollars on management training.

LO1

31

Research and Development

Research and development includes scientific research, product development, innovations in production techniques, and management improvements.

LO1

32

New Growth Theory

Old growth theory emphasized the importance of saving and investing in new plant and equipment.

New growth theory emphasizes the importance of investing in knowledge and ideas.

LO1

33

Policy Levers

Growth policy makes liberal use of the tools in the supply-side tool box.

Increase human capital investment.

Increase physical-capital investment.

Maintain stable expectations.

Pro-growth institutional framework.

LO2

34

Increasing Human Capital Investment

Governments invest in human-capital by building, operating, and subsidizing schools.

Immigration laws that promote immigration of skilled workers increase a nation’s stock of human capital.

LO2

35

Increasing Physical Capital Investment

As in the case of human capital, the possibilities for increasing physical-capital investment are also many and diverse.

LO2

36

Investment Incentives

The tax code offers mechanisms for stimulating investment:

Faster depreciation schedules.

Tax credits for new investments.

Lower business tax rates.

LO2

37

Savings Incentives

The government can use the tax code to deepen the savings pool that finances investment.

LO2

38

Infrastructure Development

The government also directly affects the level of physical capital through its public works spending.

LO2

39

Fiscal Responsibility

Short-run government policies may lead to a crowding out of consumer saving and investment.

Crowding out – A reduction in private-sector borrowing (and spending) caused by increased government borrowing.

LO2

40

Fiscal Responsibility

Fiscal and monetary policies must be evaluated in terms of their impact not only on (short-run) aggregate demand but also on long-run aggregate supply.

LO2

41

Maintaining Stable Expectations

Expectations are a critical factor in both consumption and investment behavior.

A sense of political and economic stability is critical to any long-run current trends.

LO2

42

Institutional Context

Greater economic freedom – secure property rights, open trade, lower taxes, less regulation – typically fosters faster growth.

LO2

43

Limitless Growth?

Is it possible to have limitless economic growth?

44

The Malthusian Formula for Destruction

In 1798, Reverend Thomas Malthus predicted future starvation for England.

Malthus believed population increases at a geometric rate while food supplies increase arithmetically.

LO3

45

Limits to Food Production

Geometric growth – an increase in quantity by a constant proportion each year.

Arithmetic growth – an increase in quantity by a constant amount each year.

LO3

46

Limits to Food Production

Actually, output – including agricultural products – has increased at a geometric rate, not at the much slower arithmetic rate predicted by Malthus.

LO3

47

The Malthusian Doomsday

MIL

LIO

NS

Barley and oats (bushels)

Population

Wheat

Malthus' projections of population and food supply

Malthus' projections of declining per capita food output

1800 1850 1900 1950 2000

2,400

2,000

1,600

1,200

800

400

0

BUSH

ELS

PER

CAPI

TAWheat

1800 1850 1900 1950 2000

24

4

0

8

20

16

12

Barley and oats

LO3

48

Resource Constraints

To keep growing, we need productivity improvements and resource availability.

All doomsday predictions ignore how markets promote efficient uses of scarce resources and find substitutes for them.

LO3

49

Environmental Destruction

Pollution levels have risen along with GDP and population expansion.

With current and future pollution-abatement policies, the rate of pollution does not have to increase unabated.

LO3

50

The Possibility of Growth

There are probably no limits to growth.

51

The Desirability of Growth

Continued economic growth is desirable so long as:

It brings a higher standard of living.

It brings an increased ability to produce and consume socially desirable goods and services.

LO3

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Growth and Productivity:...

Documents

Transcript of McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Growth and Productivity:...