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The Growth Process: From Agriculture to Industry

The Sources of Economic GrowthAn Increase in Labor SupplyIncreases in Physical CapitalIncreases in Human CapitalIncreases in Productivity

Growth and Productivity in the United StatesSources of Growth in the U.S. Economy: 1929–1982Labor Productivity: 1952 I–2007 IV

Economic Growth and Public Policy in the United States The Size of the MultiplierSuggested Public Policies

Growth and the Environment and Issues of Sustainability

Lecture 12

Long-Run Growth

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Long-Run Growth

economic growth An increase in the total output of an economy.

modern economic growth The period of rapid and sustained increase in output that began in the Western world with the Industrial Revolution.

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The Growth Process: From Agriculture to Industry

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.

FIGURE 17.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and to the Right

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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.

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.

From Agriculture to Industry: The Industrial Revolution

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The Growth Process: From Agriculture to Industry

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.

Growth in Modern Society

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The Growth Process: From Agriculture to Industry

Growth Patterns and the Possibility of Catch-Up

TABLE 17.1 Growth of Real GDP: 1999-2007

CountryAverage Growth RatePer Year, 1999-2007

United States 2.7

Japan 1.5

Germany 1.5

France 2.1

United Kingdom 2.7

China 9.6

India 7.0

Africa (continent) 4.5

Republic of South Africa (2002-2007) 3.9

Cameroon (2002-2007) 4.0

Zimbabwe (2007-2007) 1.0Source: Economic Report of the President, 2008.

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The Growth Process: From Agriculture to Industry

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.

Growth Patterns and the Possibility of Catch-Up

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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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The Sources of Economic Growth

An Increase in Labor Supply

labor productivity Output per worker hour; the amount of output produced by an average worker in 1 hour.

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

Period

QuantityOf Labor

L(Hours)

QuantityOf Capital

K(Units)

TotalOutputY

(Units)

MeasuredLabor

ProductivityY/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

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The Sources of Economic Growth

An Increase in Labor Supply

TABLE 17.3 Employment, Labor Force, and Population Growth, 1947–2007

CivilianNoninstitutional

PopulationOver 16 Years Old

(Millions)

CivilianLaborForce

Employment(Millions)

Number(Millions)

PercentageOf

Population

1947 101.8 59.4 58.3 57.01960 117.3 69.6 59.3 65.81970 137.1 82.8 60.4 78.71980 167.7 106.9 63.7 99.31990 189.2 125.8 66.5 118.82000 212.6 142.6 67.1 136.92007 231.9 153.1 66.0 146.0Percentage change, 1947–2007 + 127.8% + 157.7% + 156.1%Annual rate + 1.4% +1.6% + 1.6%

Source: Economic Report of the President, 2008, Table B-35.

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The Sources of Economic Growth

Increases in Physical Capital

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

Period

QuantityOf Labor

L(Hours)

QuantityOf Capital

K(Units)

TotalOutputY

(Units)

MeasuredLabor

ProductivityY/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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The Sources of Economic Growth

Increases in Physical Capital

TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 1960–2006 (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 4,090.5 6,301.6

2006 4,841.8 6,776.9

Percentage change, 1960–2006 +649.9% +198.1%

Annual rate +4.4% + 2.4%

Source: Survey of Current Business, September 2007, Table 15, p. 32 and author’s estimates.

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The Sources of Economic Growth

Increases in Physical Capital

Role of Institutions in Attracting Capital

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

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The Sources of Economic Growth

Increases in Human Capital

TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2006

Percentage With LessThan 5 Years Of

School

Percentage With 4 Years Of High School

Or More

Percentage With 4 Years Of College

Or More

1940 13.7 24.5 4.61950 11.1 34.3 6.2

1960 8.3 41.1 7.71970 5.5 52.3 10.71980 3.6 66.5 16.21990 NA 77.6 21.32000 NA 84.1 25.62006 NA 85.5 28.0

NA = not available.Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.

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The Sources of Economic Growth

Increases in Productivity

Technological Change

productivity of an input The amount of output produced per unit of an input.

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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The Sources of Economic Growth

Increases in Productivity

Economies of Scale

External economies of scale are cost savings that result from increases in the size of industries.

In addition to technological change, other advances in knowledge, and economies of scale, other forces may affect productivity.

Other Influences on Productivity

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Growth and Productivity in the United States

TABLE 17.7 Growth of Real GDP in the United States, 1871–2000

PeriodAverage Growth

Rate Per Year PeriodAverage Growth

Rate 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

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.

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Growth and Productivity in the United States

Sources of Growth in the U.S. Economy

TABLE 17.8 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 in 2.8 2.4 3.6 2.6real national income

aEconomies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.Source: Edward Denison, Trends in American Economic Growth, 1929–1982 (Washington: Brookings Institution, 1985). Reprinted with permission of The Brookings Institution.

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Growth and Productivity in the United States

Sources of Growth in the U.S. Economy

TABLE 17.9 Sources of U.S. Growth, 1995-2004

Percent Contribution 1995-2004

Increases in inputs 71.6

Labor 20.6

Capital 50.7

IT capital 22.8

Non-IT capital 27.9

Increases in productivity 28.4

Source: Information Technology and the American Growth Resurgence. Dale W. Jorgenson, Mun S. Ho and Kevin J. Stiroh (Cambridge, MA: MIT Press, 2005). Data update provided by the authors.

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Growth and Productivity in the United States

Labor Productivity: 1952 I–2007 IV

FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

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Growth and the Environment and Issues of Sustainability

TABLE 17.10 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

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 2.5Source: World Bank, “Policies and Institutions for Environmental Sustainability.”

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Growth and the Environment and Issues of Sustainability

One measure of air pollution is smoke in cities. The relationship between smoke concentration and per-capita GDP is an inverted U: As countries grow wealthier, smoke increases and then declines.

FIGURE 17.3 The Relationship Between Per-Capita GDP and Urban Air Pollution

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Growth and the Environment and Issues of Sustainability

Sustainability of Resource Extraction Growth Strategies

Much of Southeast Asia has fueled its growth through export-led manufacturing. For countries that have based their growth on resource extraction, there is another set of potential sustainability issues.

Because extraction can be accomplished without a well-educated labor force, while other forms of development are more dependent on a skilled- labor base, public investment in infrastructure is especially important.

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aggregate production function

catch-up

economic growth

foreign direct investment (FDI)

innovation

Invention

labor productivity

modern economic growth

productivity of an input

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