1. 1 Productivity and Growth CHAPTER 6 © 2003 South-Western/Thomson Learning

2. 2 Causes of Economic Growth Increases in the availability of resources. Growth in labor supply. Growth in capital stock. Improvement in technology. Improvements in the rules of the game.

3. 3 What is Productivity? Productivity measures how efficiently resources are employed the higher the productivity, the more goods and services that can be produced from a given amount of resources  the farther out will be the PPF total output divided by the amount of a particular kind of resource employed

4. 4 Labor Productivity Output per unit of labor and measures total output divided by the hours of labor employed to produce that output

5. 5 Labor Productivity The resource most responsible for increasing labor productivity is capital Two 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

6. 6 Exhibit 2: Per-Worker Production Function y k PF 0 Capital 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) Output per worker

7. 7 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 capital deepening An increase in the amount of capital per worker is called capital deepening

8. 8 Exhibit 3: Impact of a Technological Breakthrough k O u t p u t p e r w o r k e r y 0 Capital per worker PF y' 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

9. 9 Productivity / Growth in Practice World’s economies can be sorted into two broad groups Industrial market countries or developed countries Developing or third-world countries

10. 10 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

11. 11 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

12. 12 Education and Economic Development Important source of productivity is the quality of labor Role of Education: Education makes workers aware of the latest production techniques Makes workers more receptive to new ideas and methods

13. 13 Exhibit 4: Average Years of Education of Working- Age Populations in 1970 and 1998

14. 14 Exhibit 5: Long-Term Trend in U.S. Labor Productivity Growth: Annual Average by Decade Average productivity growth since 1870 is 2.1%

15. 15 Exhibit 6: U.S. Labor Productivity Growth Slowed During 1974 to 1982 and Then Rebounded

16. 16 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

17. 17 Output Per Capita Output per capita Real GDP divided by the population Best measure of economy’s standard of living Indicates how much an economy produces on average per person

18. 18 Output Per Capita Output per capita will increase if labor productivity increases for a given worker-population ratio the worker-population ratio increases for given labor productivity labor productivity and the worker- population both increase

19. 19 Exhibit 7: U.S. Real GDP per Capita Has Nearly Tripled Since 1959

20. 20 Exhibit 8: U.S. GDP Per Capita Is Highest of Major Economies

21. 21 Exhibit 9: U.S. Real GDP per Capita Outgrew Most Other Major Economies Since 1982

22. 22 Convergence Theory Convergence theory Convergence 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

23. 23 Convergence Theory Reasons why the poorest countries have not gained Birth rates are nearly double those in richer ones Vast differences in the quality of human capital across countries Some countries lack the stable macroeconomic environment, established institutions, and infrastructures needed to nurture economic growth