1. Core Growth Theory Labor and Capital Inputs
Determinants of Labor Productivity
Supply Effects of Investment
The Need for National Savings

2. Core Growth Theory Growth theory is “Macro Macro”
it attempts to explain differences in economic performance over decades and centuries, rather than months, quarters, or years
What allows an economy to produce more goods in one decade than another?
What allows one country to produce more? What creates convergence?

3. The Structure of U.S. Growth
population
x ( 1 -dependency rate )
= working age population
x labor force participation rate
= labor force
x 1 - unemployment rate

4. The Structure of U.S. Growth
= employment
x hours per employee
=hours worked
x output per hour ( “labor productivity” )
=output

5. The Structure of U.S. Growth

6. The Structure of U.S. Growth

7. The Structure of U.S. Growth

8. The Determinants of Labor Productivity
What enables an employee to produce more or less per hour at the place of work?
What “infrastructure” can the nation provide to influence:
the level of output in a workplace?
the efficiency of connection between workplaces?

9. The Determinants of Labor Productivity
What enables an employee to produce more or less per hour?
The “state of the art” potentially available (the production possibility frontier”).
His/ Her own education and training to absorb the state of the art.
The quantity and quality of available, complementary “tools” such as computers, assembly machines.

10. The Determinants of Labor Productivity
What “infrastructure” can the nation provide to influence:
the level of output in a workplace?
education, health, attitudes toward work, regulation, taxation
the efficiency of “connections” between workplaces?
communication, transportation, common language, anti-monopoly regulation, global access

11. The Determinants of Labor Productivity
Economists can refer to almost all of these factors as simply different types of “capital”
“Capital” in this context simply means something that is long-lasting and not used up by the process of production
More narrowly, “capital” sometimes only means tangible goods such as equipment, buildings, highways

12. The Determinants of Labor Productivity
Types of Capital
Tangible equipment and structures
Human, from brains through brawn
Technological, e.g. accumulated R&D
Infrastructure, i.e. tangible goods not owned by one enterprise

13. The Structure of U.S. Growth

14. The Structure of U.S. Growth

15. Supply Effects of Investment
Defining Investment
All output is either consumed or invested. This is the fundamental choice made by any important agent in an economy: enjoy today or conserve for use tomorrow.
Consumed simply means used up in the same period it was produced
Invested therefore means it was not used up and is available in at least the next period

16. Supply Effects of Investment
Capital is:
the sum of all past investments of the same type
minus all depreciation: loss through wear & tear, obsolescence & displacement

17. Supply Effects of Investment
K (Capital this period)=
K\1 (Capital in the prior period)
+ I (Investment this period)
- D (Depreciation this period)
or, K=K\1+I-D
=K\2+I\1-D\1+I-D
=K\3+I\2-D\2+I\1-D\1+I-D
=K\(N+1) + ( I\N+...+I ) - ( D\N+ ...+D )

18. Supply Effects of Investment
What nuances should be considered when differentiating among types of capital--equipment & buildings, human, technology, infrastructure?

19. Supply Effects of Investment
What nuances should be considered when differentiating among types of capital--equipment & buildings, human, technology, infrastructure?
Causes of Decay or Obsolescence
Potential for Multiple Simultaneous Users= “Public Good”
Ability to own or control once created/ put in use

20. The Need for National Saving
Defining Saving
All national income is either consumed or saved. This is another way of looking at the fundamental choice made by an economy: enjoy today or conserve for use tomorrow.
Consumed again simply means used up in the same period it was produced
saved therefore means it was not used up and is available in at least the next period (if held in a successful form).

21. Recall the Definition of Investment
Defining Investment
All output is either consumed or invested. This is the fundamental choice made by any important agent in an economy: enjoy today or conserve for use tomorrow.
Consumed simply means used up in the same period it was produced
Invested therefore means it was not used up and is available in at least the next period

22. The Links Among Saving, Investing and Productivity
All output is consumed or invested. All income is consumed or saved. Our output is fundamentally our income.
Y = OUTPUT = INCOME
OUTPUT = Y = C + I
INCOME = Y = C + S
THEREFORE S = I
WE MUST HAVING SAVINGS TO INVEST.
WE MUST HAVE INVESTMENT TO BUILD CAPITAL TO RAISE LABOR PRODUCTIVITY.

23. The Links Among Saving, Investing and Productivity
OUTPUT = Y = C + I
INCOME = Y = C + S
THEREFORE S = I
WE WILL QUALIFY THIS TO DIFFERENTIATE AMONG HOUSEHOLDS, BUSINESSES, & GOVERNMENT, AND BETWEEN DOMESTIC AND FOREIGN SPENDING, INCOME & LENDING

24. The Links Among Saving, Investing and Productivity
WE MUST HAVING SAVINGS TO INVEST.
WE MUST HAVE INVESTMENT TO BUILD CAPITAL TO RAISE LABOR PRODUCTIVITY.
HOW WELL IS THE U.S. SETTING ITSELF UP FOR GROWTH BY SAVING?
HOW WELL ARE OTHER NATIONS DOING?

25. The New Economic Order: Open Borders for Goods, Technology and Finance
Increasingly free trade with the developing world creates tremendous stress in the mature industrial economies: the opportunity to move production and assembly technologies abroad removes a previously captive privilege from the workers of the United States, Japan, and Europe. The NAFTA and EC expansions point to extended trends in this direction.
Semi-skilled labor is now in gross over-supply worldwide.
Managers and entrepreneurs will benefit.

26. Returns to Education Have Risen
(Multiple of average income)

27. The New Economic Order: Open Borders for Goods, Technology and Finance
Unprecedented technology and capital transfers plus political transformations signal high growth for selected developing nations. The earliest and most rapid advancement will occur where:
the work-force is the best educated and motivated;
the indigenous entrepreneurial climate is most positive;
equity investment and trade are encouraged;
government fiscal and monetary policies are best balanced to keep inflation and exchange risks minimal; and
the democratic heritage is strongest.

28. The Most Rapid Growth in Developing Nations Has Occurred for those Having...

29. ..High Investment Shares of GDP,

30. ...High Secondary School Enrollment Rates,

31. ...and High Trade Shares of GDP