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AP Macro: Unit 6 “Economic Growth and Productivity”

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1 AP Macro: Unit 6 “Economic Growth and Productivity”

2 Source:

3 Facts: In today’s dollars, the median American family income in 1909 was $8,000 In 2009, the median American household’s income was about $50,000 50% of world population today has a lower standard of living than U.S. a century ago China and India have only recently achieved the standard of living of the U.S. a century ago

4 Growth Rates From , U.S. RGDP increased an average of 1.9% each year Rule of 70: tells how long it takes RGDP (or any other variable) to double Ex: U.S. RGDP grows at 2% per year. How long will it take for RGDP to double? 70/2 = 35 years

5 Sources of Long-run Growth The most important ingredient: rising (labor) PRODUCTIVITY Sustained growth in RGDP per capita occurs only when the amount of output produced by the average worker increases steadily RGDP/ number of people working

6 Why are we more productive than ever? Physical capital- today’s worker makes use of about $130,000 worth of physical capital; a backhoe can dig much more trench than a person equipped with a shovel Human capital- in 1910, 13.5% of Americans had graduated from high school and 3% had graduated from college. By 2009, the percentages were 86% and 27%, respectively

7 Productivity (continued) Studies show that education is an even more important determinant of growth in productivity than increases in physical capital Technology- probably the most important driver of productivity growth; small inventions like grocery bags and Post-It notes have contributed just as large inventions like the railroad and semi-conductor chip

8 Comparing Long Run Growth “East Asia’s Miracle:” South Korea, Taiwan, Hong Kong, Singapore, and China “Latin America’s Disappointment:” Argentina, Brazil, and Chile “Africa’s Troubles:” Nigeria and others south of the Sahara

9 East Asia Since 1975, the region has increase RGDP/capita by 6% per year (remember, the U.S. has grown at 2% per year) How? High national savings have allowed them to drastically increase physical capital per worker (the big “I” in GDP) Emphasis on education and technology increased human capital

10 Korea Advanced Institute of Science and Technology (KAIST)

11 East Asia (continued) “Catch-up effect-” it’s easier to narrow the productivity gap for countries with very low rates (easier to climb to the top than stay there) “Convergence hypothesis-” relatively poor countries should (and often do) have higher rates of growth in RGDP/capita than relatively rich countries; the gaps tend to narrow over time (this is evident in East Asia, but not necessarily in Latin America or Africa, however)

12 Latin America In 1900, regarded as economically viable, with GDP’s comparable to advanced countries Rich in minerals and cultivatable land; attracted immigrants from Europe Why stagnant growth? Low saving and investment, irresponsible gov’t policies and political instability; under-emphasis on education 1980’s- tried “laissez faire” approach, but only Chile has achieved notable growth since

13 Latin America

14 Africa Sub-Saharan Africa population: 780 million Living standards lower than U.S. 200 yrs ago Why? Political instability, savage civil wars War and general anarchy has inhibited growth in education and infrastructure Property rights- extortion because of gov’t corruption reduces incentive to own Ray of light? Since mid-1990’s, Africa’s econ. Performance has been better than previously because of markets such as oil and coffee

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16 Keys to Economic Growth Adding to Physical Capital- spending higher % of GDP on investment 2009: investment spending was 44% of China’s GDP; in U.S. it was 18% Either domestic savings increases or there is an increase in foreign investment Saving and investment are crucial

17 Keys to Economic Growth Adding to Human Capital- emphasis on education Adding to Technological Progress- scientific knowledge must be transferred into useful products and processes Research and Development (R&D)- spending to create new technologies and prepare them for practical use Thomas Edison was R&D pioneer

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20 Governments and Physical Capital Infrastructure- roads, ports, power lines, information networks, and other underpinnings for economic activity The big “G” in GDP; is expansionary fiscal policy used for infrastructure?


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