ECONOMIC GROWTH AND THE NEW ECONOMY 17 C H A P T E R ECONOMIC GROWTH AND THE NEW ECONOMY

GROWTH ECONOMICS Supply Factors Increases in the Quantity & Quality of Natural Resources Increases in the Quantity & Quality of Human Resources Increases in the Supply (or Stock) of Capital Goods Improvements in Technology

GROWTH ECONOMICS Demand Factor Households, Businesses, and Government Must Purchase the Economy’s Expanded Output Efficiency Factor The Economy Must Achieve Economic Efficiency as well as Full-Employment

Economic Growth PRODUCTION POSSIBILITIES ANALYSIS Capital Goods b a Consumer Goods

Growth and Production Possibilities Labor and Productivity PRODUCTION POSSIBILITIES ANALYSIS Growth and Production Possibilities Labor and Productivity Real GDP = Worker Hours X Labor Productivity Worker-Hours Labor-Force Participation Rate Labor Productivity

SUPPLY DETERMINANTS OF REAL OUTPUT Size of employed labor force Average hours of work Labor Inputs (Hours of Work) REAL GDP = X Technological advance Quantity of capital Education and training Allocative efficiency Other Labor Productivity (Average Output Per Hour)

Production Possibilities and Aggregate Supply GROWTH IN THE AD-AS MODEL Production Possibilities and Aggregate Supply Extending the AD-AS Model

GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C A Price Level Capital Goods B D Q1 Q2 Consumer Goods Real GDP

ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 AS1 Price Level P2 P1 AD2 AD1 o Q1 Q2 Real GDP

U.S. ECONOMIC GROWTH RATES Annual Averages for Five Decades 5 4 3 2 1 Average Annual Increase (Percent) 1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 Real GDP Real GDP Per Capita

Inputs versus Productivity Quantity of Labor Technological Advance ACCOUNTING FOR GROWTH Inputs versus Productivity Quantity of Labor Technological Advance Quantity of Capital Infrastructure Education and Training Human Capital

ACCOUNTING FOR GROWTH Increase in quantity of labor 33% Sources of Growth of U.S. Output, 1929-2000 Increase in quantity of labor 33% Increase in labor productivity 67% Technological advance 26% Quantity of capital 18% Education and training 11% Economies of scale 6% Improved resource allocation 6% 100%

Changes in the Educational Attainment of the U.S. Adult Population ACCOUNTING FOR GROWTH Changes in the Educational Attainment of the U.S. Adult Population 100 80 60 40 20 Percent of U.S. Population 1950 1960 1970 1980 1990 2000 College Graduates or More High School Graduates or More Source: U.S. Census Bureau

Improved Resource Allocation Other Factors ACCOUNTING FOR GROWTH Economies of Scale Improved Resource Allocation Other Factors

Characteristics of the New Economy PRODUCTIVITY GROWTH AND THE NEW ECONOMY Characteristics of the New Economy Microchip and Information Technology New Firms and Increasing Returns Start-Up Firms

PRODUCTIVITY GROWTH AND THE NEW ECONOMY Sources of Increasing Returns More Specialized Inputs Spreading of Development Costs Simultaneous Consumption Network Effects Learning by Doing Global Competition

PRODUCTIVITY GROWTH AND THE NEW ECONOMY Macroeconomic Implications Faster Noninflationary Growth Low Natural Rate of Unemployment Growing Tax Revenues Skepticism About the New Economy

GLOBAL PERSPECTIVE 1 2 3 4 5 6 7 8 9 10 Rank Growth Competitiveness Ranking 2000 Rank United States Singapore Luxembourg Netherlands Ireland Finland Canada Hong Kong, China United Kingdom Switzerland 1 2 3 4 5 6 7 8 9 10 Source: World Economic Forum

Chapter Conclusions The Antigrowth View In Defense of Economic Growth IS GROWTH DESIRABLE AND SUSTAINABLE? The Antigrowth View In Defense of Economic Growth Chapter Conclusions

KEY TERMS infrastructure human capital economies of scale New Economy information technology start-up firms increasing returns network effects learning by doing economic growth supply factors demand factor efficiency factor labor productivity labor-force participation rate Copyright McGraw-Hill/Irwin 2002 BACK END

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