McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS Chapter 8.

Slides:



Advertisements
Similar presentations
Economic Growth Economic growth is the fundamental determinant of the long-run success of any nation, the basis source of rising living standards, and.
Advertisements

Beyond the Solow Growth Model. Three Reasons to Go Beyond the Solow Growth Model (SGM) The SGM doesn’t fit facts too well Saving and Investment Don’t.
Productivity and Growth Chapter 7. Growth is an increase in potential output Potential Output: the highest amount of output an economy can produce from.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide Workers, Wages, and Unemployment in the Modern Economy.
Productivity and Growth Chapter 7. Growth is an increase in potential output Potential Output: the highest amount of output an economy can produce from.
McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
1 Productivity and Growth Chapter 21 © 2006 Thomson/South-Western.
17:Long-Term Economic Growth
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, All Rights Reserved Chapter 6 Wages and Unemployment.
GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS Chapter 9.
Chapter 6: Economic Growth Estimate economic growth and implications of sustained growth for standard of living. Trends in economic growth in U.S. and.
1 Economic Growth and Rising Living Standards. Real GDP per Person, (in 2000 US $) 2.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.1 Chapter 7: Growth, Productivity, and Wealth in the Long Run Prepared by: Kevin Richter, Douglas.
© 2003 McGraw-Hill Ryerson Limited. Growth, Productivity, and the Wealth Of Nations Chapter 8.
Nations Have Different Economic Outcomes
Economic Growth Chapter 17. Introduction Two definitions of economic growth (from Chapter 8) – The increase in real GDP, which occurs over a period of.
Growth, Productivity, and the Wealth of Nations Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing.
23 ECONOMIC GROWTH. 23 ECONOMIC GROWTH Notes and teaching tips: 7, 13, 29, 40, 43, 45, 46, 48, 52, 59, and 60. To view a full-screen figure during.
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 17 Labor Productivity: Wages, Prices, and Employment.
Economic Growth Economic growth is growth of the standard of living as measured by per person real GDP. Our purpose in this chapter is to explain what.
12 Production and Growth.
Classical Long-Run Policy 10-2 Sources of Growth.
Global Economic Growth and Development
Sources of Long-run Growth
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13: Wages and Unemployment 1.Discuss the four important.
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply Decisions.
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 The Theory of Economic Growth: The Solow Growth Model Reading: DeLong/Olney:
9 Economic Growth CHAPTER CHECKLIST
Trends in U.S Economic Growth Growth in the U.S. Economy  From 1908 to 2008, annual growth in real GDP per person in the United States averaged 2%. 
1 Chapter 20 Economic Growth and Rising Living Standards.
Production Function and Promoting Growth. The Production Function and Theories of Growth The production function shows the relationship between the quantity.
Macro233 - JAFGAC Growth, Productivity, and the Wealth Of Nations Chapter 8.
Introduction: Thinking Like an Economist CHAPTER 10 Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing.
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Costs of Production Chapter 6.
Production and Growth ETP Economics Jack Wu.
1 ECON203 Principles of Macroeconomics Week 6 Topic: ECONOMIC GROWTH Dr. Mazharul Islam.
Classical Long-Run Policy Chapter Chapter Goals  Define growth, list its benefits and costs, and relate it to living standards  Discuss the relationship.
Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 7 International Factor Movements.
Growth and Productivity: Long-Run Possibilities Chapter 17 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Of 261 Chapter 26 Long-Run Economic Growth. of 262 Copyright © 2005 Pearson Education Canada Inc. Learning Objectives 3. List the main elements of Neoclassical.
1 Long-Run Economic Growth and Rising Living Standards Economic Growth.
© 2007 Thomson South-Western. In this section, look for the answers to these questions: Why does productivity matter for living standards? What determines.
9 THE REAL ECONOMY IN THE LONG RUN. Copyright © 2004 South-Western 25 Production and Growth.
Economic growth Chapter 8 4/23/2017 4/23/
Introduction: Thinking Like an Economist CHAPTER 9 The Theory of Economics…is a method rather than a doctrine, an apparatus of the mind, a technique of.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 26 Long-Run Economic Growth.
Principles of Macroeconomics: Ch 12 First Canadian Edition Overview-7 u How economic growth differs around the world u Why productivity is the key determinant.
Chapter 6 Lecture – Economic Growth Sapa, Vietnam *Dennis C. McCornac.
Chapter 7: Economic Growth and Development. 7.1 Defining Economic Growth A country’s standard of living depends on its ability to produce goods and services.
Chapter 9 Growth McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 14: Economic Growth 1.Show how small differences in.
Chapter Production and Growth 25. Economic Growth Around the World Real GDP per person – Living standard – Vary widely from country to country Growth.
ECONOMIC GROWTH Mr. Griffin AP Economics - Macro: VI.
Production and Growth  How economic growth differs around the world  Why productivity is the key determinant of a country’s.
Macro Review Day 2. The Aggregate Demand/ Aggregate Supply Model 27 Components of the AS/AD Model Aggregate Demand Curve (AD) Is a curve that shows how.
Growth Productivity Wealth of Nations Part one. Laugher Curve We have two classes of forecasters: Those who don't know, and those who don't know they.
McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. THE PRODUCTION POSSIBILITY MODEL, TRADE, AND GLOBALIZATION THE.
FINA 353 Principles of Macroeconomics Lecture 5 Topic: ECONOMIC GROWTH
GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS
Rising Living Standards
THE REAL ECONOMY IN THE LONG RUN
Growth, Productivity, and the Wealth Of Nations
Chapter 6: Economic Growth
Economic Growth and Productivity
Chapter 6: Economic Growth
Beyond the Solow Growth Model
Econ 101: Intermediate Macroeconomic Theory Larry Hu
Chapter 6 Lecture – Economic Growth
Presentation transcript:

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. GROWTH, PRODUCTIVITY, AND THE WEALTH OF NATIONS Chapter 8

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-2 Today’s lecture will: Define growth and relate it to living standards. Discuss the five sources of growth. Distinguish diminishing marginal productivity from decreasing returns to scale. Explain the convergence hypothesis and four reasons why it has occurred. Distinguish Classical growth theory from new growth theory. Discuss six government policies to promote growth.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-3 Economic Growth Growth is an increase in potential output. Potential output – the maximum output an economy can produce from the existing production function and existing resources. The short-run focus is on how to get the economy operating at its potential. The long-run growth focus is on how to increase potential output.  It assumes Say’s Law – supply creates its own demand.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-4 Importance of Growth for Living Standards Growth improves average living standards. Because of compounding, long-term growth rates can make huge differences. Rule of 72 – # years to double= 72/ growth rate. If China’s economy grows 9% per year and the U.S. grows 2% per year, in 72 years  U.S. per capita income = $160,000  China’s per capita income = $512,000

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-5 Markets, Specialization, and Growth Markets, specialization, and the division of labor increase productivity and growth.  Specialization – the concentration of individuals on certain aspects of production.  Division of labor – the splitting up of a task to allow for specialization of production. Markets may seem to be unfair because of the effect that they have on the distribution of income.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-6 Economic Growth, Distribution, and Markets Markets may not provide equality of income, but they make the poor better off. There is strong evidence that the poor benefit enormously from the growth that markets foster. Just because the poor benefit from growth does not mean that they might not benefit more is income were distributed more in their favor.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-7 Cost of Goods in Hours of Work Price in minutes of work Milk (½ gallon) Beef (1 pound) Eggs (1 dozen) Bread (1 pound) Chicken (3 lb. fryer) 2005 Beef (1 pound) Eggs (1 dozen) Bread (1 pound) Chicken (3 lb. fryer) Milk (½ gallon)

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-8 Per Capita Growth Per capita output is total output divided by total population. Per capita growth means producing more goods and services per person. Per capita growth = % Δ in output - %Δ in population Median income is a better measure because it takes into account how income is distributed.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-9 The Sources of Growth Capital accumulation – investment in productive capacity Available resources Growth compatible institutions Technological development Entrepreneurship

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Investment and Accumulated Capital Investment and Accumulated Capital Although capital is a key element in growth, capital accumulation does not necessarily lead to growth. Capital may become obsolete. Capital is much more than machines. It includes:  Human capital – skills that workers gain from experience, education, and on-the-job training.  Social capital – the habitual way of doing things that guides people in how they approach production.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Available Resources The growth in the U.S. in the 20 th century was due in part to its large supply of natural resources. New technology can overcome a lack of resources. Greater participation in the market may increase the labor force participation rate.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Growth-Compatible Institutions Markets and private ownership of property foster economic growth. When individuals get much of the gains of growth themselves, they work harder. Corporations are a growth-compatible institution because of limited liability, which gives stockholders an incentive to invest their savings in large enterprises.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Technological Development Technology - changes in the way we make goods and supply services, and in the goods and services we buy. Advances in technology shift the production possibilities curve outward by making workers more productive. Important developments in biotechnology, computers, and communications have helped fuel U.S. growth.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-14Entrepreneurship Entrepreneurship is the ability to get things done using creativity, vision, and a talent for translating vision into reality. Examples of American entrepreneurs include:  Thomas Edison – generation and use of electricity  Henry Ford – automobile production  Bill Gates – computers and software

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Sources of Real U.S. Growth, The five sources of growth must be mixed in the right proportions. Economist Edward Denison estimated the importance of four sources of growth. Human capital (13%) Physical capital (19%) Technology (35%) Labor (33%)

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved The Production Function Production function shows the relationship between inputs and outputs. Growth is shown by a shift in the production function. Output = A●F(labor, capital, land)

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Describing Production Functions Constant returns to scale – output will rise by the same proportionate increase as all inputs. Increasing returns to scale – output will rise by a greater proportionate increase as all inputs. Decreasing returns to scale – output will rise by a smaller proportionate increase as all inputs. The law of diminishing marginal productivity – increasing one input, keeping all others constant, will lead to smaller and smaller gains in output.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved The Classical Growth Model According to the Classical growth model, the more capital an economy has, the faster it will grow. Classical economists focused their analysis and their policy advice on how to increase investment: savings investment increase in capitalgrowth

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Diminishing Marginal Productivity of Labor The Classical growth model focused on how diminishing marginal productivity of labor would limit growth. Since the amount of farm land is fixed, diminishing marginal productivity would set in as population grew. The iron law of wages - as output per person declines, at some point available output is no longer sufficient to feed the population. This long-run outcome was called the stationary state.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Diminishing Returns and Population Growth Output Labor Subsistence level of output per worker Production function Q1Q1 Q2Q2 L1L1 L*

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Diminishing Marginal Productivity of Capital The predictions for the long term were incorrect because increases in technology and capital overwhelmed diminishing marginal productivity. The focus became the diminishing marginal productivity of capital, not labor. Capital grows faster than labor Capital is less productive Slower growth of output Per capita growth stagnates

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved The Convergence Hypothesis The diminishing marginal productivity of capital leads to the convergence hypothesis – per capita income in countries with similar institutional structures will converge to the higher level. The U.S. will grow slower because the marginal product of capital is higher in developing countries, hence costs of production are lower. This difference causes capital investment flows and production to move from the U.S. to developing countries.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved The Convergence Hypothesis As of the early 2000s the predictions of convergence have not come true. Economists have several explanations of why convergence has not taken place:  Lack of factor mobility  Differing institutional structure  Incomparable factors of production  Technological agglomeration effects

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Lack of Factor Mobility and Differing Institutional Structure The transfer of capital and technology causes convergence. If there are barriers to factor mobility, convergence is slowed down or reduced. The more similar the institutional structures, the more likely convergence will occur because firms are more likely to move production to countries that are well-suited to business.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Incomparable Factors of Production Labor in various countries differ in skills, education, experience, and effort. When a society’s workers become more educated, that country’s human capital increases even though labor hours may not change. Increases in human capital allow labor to keep pace with capital and avoid the diminishing marginal productivity of capital.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Technological Agglomeration Technological agglomeration – the tendency of technological advance to spawn further technological advances, creating a concentration of new technologies in a specific location. As long as new technological advances occur faster in developed countries than older technologies diffuse into less developed countries, convergence need not take place.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved New Growth Theory Unlike Classical growth theory, which left technology outside of economic analysis, new growth theory emphasizes the role of technology rather than capital in the growth process. Technological advanceInvestment Further technological advance Growth

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Technology Doesn’t Just Happen Investment in research and development increases technology. Patents provide incentives for innovation. New technology leads to newer technology, which leads to accelerating growth. Basic research has positive externalities.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Learning by Doing New growth theory also highlights learning by doing. Learning by doing – improving the methods of production through experience. Learning by doing overcomes the law of diminishing marginal productivity. Learning by doing leads to increasing returns to scale.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Does an Economy Always Use the Best Technology? Technological lock-in occurs when old technologies become entrenched in the market. More efficient technologies may be available. Network externalities ( the use by one individual makes a technology more valuable to others) lead to technological lock-in.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Economic Policies to Encourage Per Capita Growth Encourage saving and investment. Control population growth. Increase the level of education. Create institutions that encourage technological innovation. Provide funding for basic research. Increase the economy’s openness to trade.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Policies to Encourage Saving and Investment The U.S. has used tax incentives to increase saving to provide funds for investment. It is difficult for poor countries with low incomes to generate saving and investment. In developing countries, microcredit banks, banks that make small loans to poor people using alternate forms of collateral, have been successful in encouraging investment by small businesses. Foreign investment in loans from the IMF or World Bank are sources of foreign investment for developing countries.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Policies to Control Population Growth Developing nations whose populations are rapidly growing have difficulty providing enough capital and education for everyone. Policies that reduce population growth include:  Free-family planning services.  Increasing the availability of contraceptives.  Harsh mandatory one-child-per-family policies such as China adopted in 1980.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Policies to Increase the Level of Education Increasing the educational level and skills of the workforce increases labor productivity. An additional year of education increases wages by 10% in the U.S.; by 15-20% in developing countries. In the U.S. policies to increase education include free mandatory education through high school and financial support for students in higher education.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Policies to Create Institutions that Encourage Technological Innovation Create patents and protect property rights. Corporations and financial institutions.  The limited liability of corporations encourages savers to make their funds available for investment.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Provide Funding for Basic Research Individual firms have little incentive to do basic research because of technology’s “common knowledge” aspect. This is why the government is involved, funding 60% of basic research in the U.S.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Policies to Increase Openness to Trade Free trade encourages growth by broadening the market and by fostering competition. In order to specialize, you need to sell your product to a large number of people. Large markets allow firms to produce and sell more output so that they can take advantage of economies of scale.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-38Summary Growth is an increase in the amount of goods and services an economy can produce when both labor and capital are fully employed. Growth increases potential output and shifts the production possibility curve out, allowing an economy to produce more goods. Per capita growth means producing more goods and services per person.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-39Summary The production function shows the relationship between the quantity of resources and the output. Output = A●f(Labor, Capital, Land) The law of diminishing marginal productivity states that increasing one input, keeping all others constant, will lead to smaller and smaller gains in output. Returns to scale describes what happens to output when all inputs increases equally.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-40Summary The convergence hypothesis is that per capita income in countries with similar institutional structures will converge. Convergence has not taken place because of:  the lack of factor mobility.  differing institutional structures.  incompatible factors of production.  technological agglomeration.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-41Summary The Classical growth model focuses on the role of capital accumulation in the growth process. The law of diminishing productivity limits growth of per capita income. New growth theory emphasizes the role of technology in the growth process. Advances in technology, which account for 35% of growth, have overwhelmed the effects of diminishing returns.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. 8-42Summary Six government policies to promote growth are:  Encourage saving and investment.  Control population growth.  Increase the level of education.  Create institutions that encourage technological innovation.  Fund basic research.  Increase openness to trade.

McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved Review Question 8-1 Explain the difference between the Classical growth theory and new growth theory. Classical growth theory is a model of growth that focuses on the role of capital accumulation in growth. According to the Classical theory, the more capital an economy has, the faster it will grow. New growth theory emphasizes the role of technology rather than capital in the growth process. Increases in technology can shift the production possibilities curve out and allow the society to produce more output without new resources. Review Question 8-2 List six government policies that can promote growth. Government policies to promote growth include: encourage saving and investment, control population growth, increase the level of education, create institutions that encourage technological innovation, fund basic research, and increase openness to trade.