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Productivity and Growth

CHAPTER

6

© 2003 South-Western/Thomson Learning

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Causes of Economic GrowthIncreases in the availability of resources.

Growth in labor supply.

Growth in capital stock.

Improvement in technology.

Improvements in the rules of the game.

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What is Productivity?

Productivitymeasures how efficiently resources are employedthe higher the productivity, the more goods and services that can be produced from a given amount of resources the farther out will be the PPFtotal output divided by the amount of a particular kind of resource employed

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Labor Productivity

Output per unit of labor and measures total output divided by the hours of labor employed to produce that output

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Labor Productivity

The resource most responsible for increasing labor productivity is capitalTwo broad categories of capital

Human Capital• Accumulated knowledge, skill, and experience of

the labor force

Physical Capital• Includes the machines, buildings, roads, airports,

communication networks and other manufactured creations used to produce goods and services

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Exhibit 2: Per-Worker Production Function

y

k

PF

0Capital per worker

Expresses the relationship between the amount of capital per worker (horizontal axis) and the output per worker (vertical axis), other things constant (level of technology and the rules of the game)

Ou

tpu

t p

er w

ork

er

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Per Worker Production Function

The shape of the per-worker production function reflects the law of diminishing marginal returns

When applied to capital says that the more capital per worker there is already, the less additional output can be gained by increasing capital stock per worker even more

An increase in the amount of capital per worker is called capital capital deepeningdeepening

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Exhibit 3: Impact of a Technological Breakthrough

k

Ou

t pu

t p

er

wo

r ke

ry

0Capital per worker

PFy'

PF'Technological change usually improves the quality of capital and increases productivity, shown by the upward rotation from PF to PF' more output is produced at each level of capital per worker

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Productivity / Growth in Practice

World’s economies can be sorted into two broad groups

Industrial market countries or developed countriesDeveloping or third-world countries

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Industrial market countries

Developed countries which make up about 20% of the world’s population

Economically advanced capitalistic countries

Western Europe, North America, Australia, New Zealand, and Japan

Were the first to experience long-term economic growth and have the highest standard of living

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Developing Countries

80% of the world’s population

Have a lower standard of living because of relatively less human and physical capital

On average, the majority of workers in these countries are employed in agriculture

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Education and Economic Development

Important source of productivity is the quality of labor

Role of Education:

Education makes workers aware of the latest production techniquesMakes workers more receptive to new ideas and methods

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Exhibit 4: Average Years of Education of Working-Age Populations in 1970 and 1998

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Exhibit 5: Long-Term Trend in U.S. Labor Productivity Growth: Annual Average by Decade

Average productivity growth since 1870 is 2.1%

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Exhibit 6: U.S. Labor Productivity Growth Slowed During 1974 to 1982 and Then Rebounded

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Output Per Capita

Even if labor productivity did not increase, total output would grow if the quantity of labor increased

Labor productivity equals real GDP divided by the quantity of labor real GDP equals labor productivity times the quantity of labor

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Output Per Capita

Output per capitaReal GDP divided by the populationBest measure of economy’s standard of livingIndicates how much an economy produces on average per person

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Output Per Capita

Output per capita will increase if

labor productivity increases for a given worker-population ratiothe worker-population ratio increases for given labor productivitylabor productivity and the worker-population both increase

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Exhibit 7: U.S. Real GDP per Capita Has Nearly Tripled Since 1959

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Exhibit 8: U.S. GDP Per Capita Is Highest of Major Economies

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Exhibit 9: U.S. Real GDP per Capita Outgrew Most Other Major Economies Since 1982

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Convergence Theory

Convergence theoryConvergence theory argues that developing countries can grow faster than advanced ones should eventually close the gap

It is easier to copy new technology once it is developed than to develop new technology

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Convergence Theory

Reasons why the poorest countries have not gained

Birth rates are nearly double those in richer onesVast differences in the quality of human capital across countriesSome countries lack the stable macroeconomic environment, established institutions, and infrastructures needed to nurture economic growth