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Chapter 24

Chapter 24. Long-Run Economic Growth. Economic Principles. Capital-labor and capital-output ratios Technology and labor productivity Labor productivity and economic growth Saving, investment, and economic growth. Long-Run Economic Growth.

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Chapter 24

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  1. Chapter 24 Long-Run Economic Growth Gottheil — Principles of Economics, 7e

  2. Economic Principles • Capital-labor and capital-output ratios • Technology and labor productivity • Labor productivity and economic growth • Saving, investment, and economic growth Gottheil — Principles of Economics, 7e

  3. Long-Run Economic Growth The “trajectory” of world GDP over the course of 400 years is a lot like the take-off a jet airliner on 7,000 feet of runway. See Exhibit 1. Gottheil — Principles of Economics, 7e

  4. EXHIBIT 1 GROWTH of GDP By REGION: 1600–2001 (in 1990 International Dollars) Source: Maddison (2003). Gottheil — Principles of Economics, 7e

  5. Exhibit 1: Growth of GDP by Region: 1600–2001 Where has the “take-off” in GDP been less dramatic and why? • Africa because that continent did not experience the Industrial Revolution of Western Europe and North American. Gottheil — Principles of Economics, 7e

  6. EXHIBIT 2 ESTIMATES OF WORLD GDP: YEARS 100–1998 (bills of international PPP dollars) Source: Angus Maddison, University of Greningen. Gottheil — Principles of Economics, 7e

  7. Exhibit 2: Estimates of World GDP: Years 100–1998 While long-run economic growth has been part of the human experience, what does Exhibit 2 tell us? • The last two centuries of world GDP stand in very sharp contrast to the millennia of previous GDPs. Gottheil — Principles of Economics, 7e

  8. EXHIBIT 3 SHARE OF WORLD GDP, BY SELECTED COUNTRY OR REGION: 100–1998 (%) Source: Angus Maddison, University of Greningen. Gottheil — Principles of Economics, 7e

  9. Exhibit 3: Share of World GDP, by Selected Country or Region: 100–1998 (%) Who were the world’s economic superpowers over most of the past 2,000 years? India and China The United States and Russia Western Europe and Japan Gottheil — Principles of Economics, 7e

  10. Exhibit 3: Share of World GDP, by Selected Country or Region: 100–1998 (%) Who were the world’s economic superpowers over most of the past 2,000 years? India and China The United States and Russia Western Europe and Japan Gottheil — Principles of Economics, 7e

  11. Reaching Back If long-run GDP growth is an indicator, then economic progress is what world societies have experienced from time immemorial. Gottheil — Principles of Economics, 7e

  12. Reaching Back Measured in production, labor force, capital and productivity per worker, technology, or living standards, the economies of the modern world dwarf the accomplishments of the economies of ancient civilizations. Gottheil — Principles of Economics, 7e

  13. EXHIBIT 4 WORLD GDP PER CAPITA: YEAR 1 to 2000 (in U.S. $) Source: Angus Maddison, University of Greningen. Gottheil — Principles of Economics, 7e

  14. Exhibit 4: World GDP per Capita: Year 1 to 2000 What parallel can you see in Exhibit 4 in relation to world GDP? • The long-run rate of population growth matches the long-run growth in world GDP. • Thus, the standard of living—measured by GDP per capita—has remained virtually unchanged. Gottheil — Principles of Economics, 7e

  15. EXHIBIT 5 GROWTH IN GDP PER CAPITA BY REGION: YEAR 1 to 2000 Source: Angus Maddison, The World Economy: A Millennial Perspective (OECD, 2001). Gottheil — Principles of Economics, 7e

  16. Exhibit 5: Growth in GDP per Capita by Region: Year 1 to 2000 While historically the world’s standard of living has increased dramatically from 1900 to 2000, what is obvious in Exhibit 5? • Only a few economies, that of Western Europe and its offshoots, have enjoyed a greater part of this increase. Gottheil — Principles of Economics, 7e

  17. Long-Run Economic Growth What caused the upsurge in GDP during the 18th, 19th, and 20th centuries? The Whiskey Rebellion The European Enlightenment Isaac Newton Gottheil — Principles of Economics, 7e

  18. Long-Run Economic Growth What caused the upsurge in GDP during the 18th, 19th, and 20th centuries? The Whiskey Rebellion The European Enlightenment Isaac Newton Gottheil — Principles of Economics, 7e

  19. EXHIBIT 6 LONG-RUN ECONOMIC GROWTH Gottheil — Principles of Economics, 7e

  20. Exhibit 6: Long Run Economic Growth Points a and b in Panel a shows real GDP on the aggregate supply curve AS1 with a fixed set of resources. Panel b shows the possibilities of higher levels of real GDP with changing levels of economic resources. Gottheil — Principles of Economics, 7e

  21. Modern Economic Growth Economic growth • An increase in real GDP, typically expressed as an annual rate of real GDP growth. Gottheil — Principles of Economics, 7e

  22. Modern Economic Growth In The Wealth of Nations, Adam Smith identified four principal factors that contribute to a nation’s economic growth. What are they? Gottheil — Principles of Economics, 7e

  23. Modern Economic Growth Smith’s principal factors that contribute to a nation’s economic growth: a. The size of its labor force. b. The degree of labor specialization. c. The size of its capital stock. d. The level of its technology Gottheil — Principles of Economics, 7e

  24. Modern Economic Growth Labor productivity • The quantity of GDP produced per worker, typically measured in quantity of GDP per hour of labor. Gottheil — Principles of Economics, 7e

  25. Modern Economic Growth Capital deepening • A rise in the ratio of capital to labor. Gottheil — Principles of Economics, 7e

  26. Modern Economic Growth Labor skills • The proficiency to perform actual tasks and technical functions required in specific occupational fields. These skills reflect the laborer’s natural ability, experience-on-job, and education. Gottheil — Principles of Economics, 7e

  27. Modern Economic Growth Efficiency gains • The increase in productivity associated with adoption of new technology and the reorganization of the workplace to accommodate the technology. Gottheil — Principles of Economics, 7e

  28. Modern Economic Growth Entrepreneurship • A person who alone assumes the risks and uncertainties of business. Gottheil — Principles of Economics, 7e

  29. EXHIBIT 7 THE LABOR PRODUCTIVITY CURVE Gottheil — Principles of Economics, 7e

  30. Exhibit 7: The Labor Productivity Curve How does capital deepening affect labor productivity? • The more capital per laborer, the greater the laborer’s productivity. Moreover, new technology can shift upwards the labor productivity curve. Gottheil — Principles of Economics, 7e

  31. Modern Economic Growth Capital-labor ratio • The ratio of capital to labor, reflecting the quantity of capital used by each laborer in production. Gottheil — Principles of Economics, 7e

  32. Modern Economic Growth 1. If capital is $50,000 and labor is 200, what is the capital-labor ratio? • The capital-labor ratio is ($50,000/200) = $250. Gottheil — Principles of Economics, 7e

  33. Modern Economic Growth 2. If real GDP increases from $10,000 to $12,000, and labor rises from 100 to 105, what has happened to labor productivity? • Output per laborer rises from ($10,000)/100 = $100 to ($12,000)/105 = $114.29 Gottheil — Principles of Economics, 7e

  34. Modern Economic Growth 3. Which of the following represents capital deepening? a. Increased worker experience b. Increased worker training c. Increased capital-labor ratio Gottheil — Principles of Economics, 7e

  35. Modern Economic Growth 3. Which of the following represents capital deepening? a. Increased worker experience b. Increased worker training c. Increased capital-labor ratio Gottheil — Principles of Economics, 7e

  36. Modern Economic Growth Capital-output ratio • The ratio of capital stock to GDP. Gottheil — Principles of Economics, 7e

  37. Modern Economic Growth According to Adam Smith and many economists today, savings automatically convert to investment spending, so that investment-induced growth is dependent on savings. Gottheil — Principles of Economics, 7e

  38. Modern Economic Growth Changes in technology can increase labor productivity and GDP without there being any change in the value of the capital stock. Gottheil — Principles of Economics, 7e

  39. EXHIBIT 8 THE GROWTH PROCESS Gottheil — Principles of Economics, 7e

  40. Exhibit 8: The Growth Process 1. According to Exhibit 8, what will happen to consumption and investment next year as a consequence of investment this year? • Investment this year increases next year’s capital stock, which in turn generates an increase in next year’s consumption and investment spending. Gottheil — Principles of Economics, 7e

  41. Exhibit 8: The Growth Process 2. What will happen to potential future economic growth if more of GDP is consumed and less is invested? • Less investment today means less economic growth in the future. Gottheil — Principles of Economics, 7e

  42. EXHIBIT 9 GROSS NATIONAL SAVING IN THE UNITED STATES: 1960–2007 Source: Council of Economic Advisors, Economic Report of the President (Washington, D.C., U.S. Government Printing Office, 2007). P. 73. Gottheil — Principles of Economics, 7e

  43. Exhibit 9: Gross National Savings in the United States: 1960–2007 According to Exhibit 9, what is the relationship between personal savings and government savings? • It appears that they may be inversely proportional. Gottheil — Principles of Economics, 7e

  44. EXHIBIT 10 AVERAGE ANNUAL PRODUCTIVITY GROWTH, SELECTED COUNTRIES: 1990–2005 Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2007). Gottheil — Principles of Economics, 7e

  45. Exhibit 10: Average Annual Productivity Growth, Selected Countries: 1990–2005 What is noteworthy about the productivity of the United States compared to other nations? • U.S. annual productivity growth has consistently risen over this 16-year period. Gottheil — Principles of Economics, 7e

  46. EXHIBIT 11 SOURCES OF LABOR PRODUCTIVITY GROWTH: 1990–2005 Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2007). Gottheil — Principles of Economics, 7e

  47. Exhibit 11: Sources of Labor Productivity Growth: 1990–2005 What increases brought about the rise in U.S. productivity in Exhibit 10? Examine Exhibit 11. • Labor skills • Capital deepening via major investment • Efficiency gains through technological change Gottheil — Principles of Economics, 7e

  48. EXHIBIT 12 REAL GDP AND ANNUAL RATE OF GDP GROWTH: 1990–2005 (billions 2000 $ and percent) Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2008). Gottheil — Principles of Economics, 7e

  49. Exhibit 12: Real GDP and Annual Rate of GDP Growth: 1990–2005 Despite business cycles, the rate of GDP grown in Exhibit 12 can be averaged out to show? • Eight of the 16 years were greater than 3%. • The performance of the U.S. economy is exemplary. Gottheil — Principles of Economics, 7e

  50. How Economics Growth Affects Your Life One way of measuring the gains you personally derive from years of previous economic growth is to compare the cost your grandparents or perhaps great-grandparents had to pay to acquire things to the cost you pay now.. Gottheil — Principles of Economics, 7e

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