Productivity and growth
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Productivity and Growth. Chapter 7. Growth is an increase in potential output. Potential Output: the highest amount of output an economy can produce from the existing production function and the existing resources. Real GDP per Person in Five Industrialized Countries, 1870 - 2000.

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Productivity and Growth

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Productivity and Growth

Chapter 7


Growth is an increase in potential output

Potential Output: the highest amount of output an economy can produce from the existing production function and the existing resources.


Real GDP per Person in Five Industrialized Countries, 1870 - 2000


The Remarkable Rise in Living Standards: The Record

  • A Caveat

    • Historical estimates are less precise

    • Comparing economic output over a century cannot account for new goods and services


Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stocking for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.

--Joseph Schumpeter


Milk (½ gallon)

Beef (1 pound)

1919

Eggs (1 dozen)

Bread (1 pound)

Chicken (3 lb. fryer)

Milk (½ gallon)

Beef (1 pound)

1997

Eggs (1 dozen)

Bread (1 pound)

Chicken (3 lb. fryer)

0

50

100

150

200

Price in minutes of work

Cost of Goods in Hours of Work


Today, the U.S. poverty level for a family of four is about $18,000. If we go back 100 years in U.S. history, and adjust for inflation, that $18,000 would put a family in the upper middle class.


Why “Small” Differences in Growth Rates Matter

  • Compound Interest

    • Suppose:

      • In 1800 $10 deposited @ 4% interest

      • In 2000 the account is worth $25,507.50

      • $10 x (1.04)200 = $25,507.50


Compounding Effect

Rule of 72: the number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of increase.


Why Nations Become Rich: The Crucial Role of Average Labor Productivity

  • Real GDP Per Person


Real GDP per Person and Average Labor Productivity in the U.S., 1960 - 2000


Share of the U.S. Population Employed, 1960 - 2000


Why Nations Become Rich: The Crucial Role of Average Labor Productivity

  • Question

    • What determines a nation’s economic growth rate?

      • In the long run, increases in output per person arise primarily from increases in average labor productivity.


The Determinants of Average Labor Productivity

  • Human Capital

    • The talents, education, training, and skills of workers

      http://www.youtube.com/watch?v=4wp3m1vg06Q


The Determinants of Average Labor Productivity

  • Physical Capital


Average Labor Productivity and Capital per Worker in 15 Countries, 1990


The Determinants of Average Labor Productivity

  • Land and Other Natural Resources

    • Generally, an abundance of natural resources increases the productivity of workers.

    • Resources can be obtained through international markets.


The Determinants of Average Labor Productivity

  • Technology

    • New technologies are the single most important source of productivity improvement.

    • A new technology will expand the productivity in many sectors by stimulating greater specialization.


The Determinants of Average Labor Productivity

  • Entrepreneurship and Management

    • Factors influencing entrepreneurship

      • Taxation

      • Regulation

      • Social Customs


Sources of Growth

  • Capital accumulation.

  • Available resources.

  • Growth-compatible institutions.

  • Technological development.

  • Entrepreneurship.


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