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 ofTefft 28 PART IV Further Macroeconomics Issues © 2012 Pearson Education, Inc Publishing as Prentice Hall 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 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 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 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 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 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 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 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 = × 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 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 K Period Quantity of Labor L Quantity of Capital K Total Output Y Labor Productivity Y/L 100 100 300 3.0 3.0 100 110 310 3.1 2.8 100 120 319 3.2 2.7 100 130 327 3.3 2.5 © 2012 Pearson Education, Inc Publishing as Prentice Hall Y/ 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 Years of School Percentage with Years of High School or More Percentage with 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 ECONOMICS IN PRACTICE 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 ... and Issues of Sustainability 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... 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... 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