chapter 24 long-run economic growth gottheil — principles of economics, 6e © 2010 cengage...

Chapter 24Chapter 24

LONG-RUN ECONOMIC LONG-RUN ECONOMIC GROWTHGROWTH

Gottheil — Principles of Economics, 6e© 2010 Cengage Learning1

Economic PrinciplesEconomic Principles

© 2010 Cengage Learning Gottheil — Principles of Economics, 6e2

Capital-labor and capital-output ratios

Technology and labor productivity

Labor productivity and economic growth

Saving, investment, and economic growth

Long-Run Economic GrowthLong-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.


EXHIBIT 1 GROWTH of GDP By REGION: 1600–2001(in 1990 International Dollars)

Source: Maddison (2003).

Exhibit 1: Growth of GDP by Exhibit 1: Growth of GDP by Region: 1600–2001Region: 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.


EXHIBIT 2 ESTIMATES OF WORLD GDP: YEARS 100–1998 (bills of international PPP dollars)

Source: Angus Maddison, University of Greningen.

Exhibit 2: Estimates of World Exhibit 2: Estimates of World GDP: Years 100–1998GDP: 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.


EXHIBIT 3 SHARE OF WORLD GDP, BY SELECTEDCOUNTRY OR REGION: 100–1998 (%)


Exhibit 3: Share of World GDP, by Exhibit 3: Share of World GDP, by Selected Country or Region: Selected Country or Region:

100–1998 (%)100–1998 (%)


Who were the world’s economic superpowers over most of the past 2,000 years?I. India and China

II. The United States and Russia

III. Western Europe and Japan

Reaching BackReaching Back


If long-run GDP growth is an indicator, then economic progress is what world societies have experienced from time immemorial.

Reaching BackReaching 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.


EXHIBIT 4 WORLD GDP PER CAPITA: YEAR 1 to 2000(in U.S. $)


Exhibit 4: World GDP per Capita: Exhibit 4: World GDP per Capita: Year 1 to 2000Year 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.


EXHIBIT 5 GROWTH IN GDP PER CAPITA BY REGION:YEAR 1 to 2000

Source: Angus Maddison, The World Economy: A Millennial Perspective (OECD, 2001).

Exhibit 5: Growth in GDP per Capita Exhibit 5: Growth in GDP per Capita by Region:by Region: Year 1 to 2000Year 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.



What caused the upsurge in GDP during the 18th, 19th, and 20th centuries?

I. The Whiskey Rebellion

II. The European Enlightenment

III. Isaac Newton


EXHIBIT 6 LONG-RUN ECONOMIC GROWTH

Exhibit 6: Long Run Economic Exhibit 6: Long Run Economic GrowthGrowth


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.

Modern Economic GrowthModern Economic Growth


Economic growth

• An increase in real GDP, typically expressed as an annual rate of real GDP growth.



In The Wealth of Nations, Adam Smith identified four principal factors that contribute to a nation’s economic growth. What are they?



a. The size of its labor force.

Smith’s principal factors that contribute to a nation’s economic growth:

b. The degree of labor specialization.

c. The size of its capital stock.

d. The level of its technology



Labor productivity

• The quantity of GDP produced per worker, typically measured in quantity of GDP per hour of labor.



Capital deepening

• A rise in the ratio of capital to labor.



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.



Efficiency gains

• The increase in productivity associated with adoption of new technology and the reorganization of the workplace to accommodate the technology.



Entrepreneurship

• A person who alone assumes the risks and uncertainties of business.


EXHIBIT 7 THE LABOR PRODUCTIVITY CURVE

Exhibit 7: The Labor Exhibit 7: The Labor Productivity CurveProductivity 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.



Capital-labor ratio

• The ratio of capital to labor, reflecting the quantity of capital used by each laborer in production.



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.



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



3. Which of the following represents capital deepening?

a. Increased worker experience

b. Increased worker training

c. Increased capital-labor ratio



Capital-output ratio

• The ratio of capital stock to GDP.



According to Adam Smith and many economists today, savings automatically convert to investment spending, so that investment-induced growth is dependent on savings.



Changes in technology can increase labor productivity and GDP without there being any change in the value of the capital stock.


EXHIBIT 8 THE GROWTH PROCESS

Exhibit 8: The Growth ProcessExhibit 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.

Exhibit 8: The Growth ProcessExhibit 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.


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.

Exhibit 9: Gross National Savings in Exhibit 9: Gross National Savings in the United States: 1960–2007the 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.


EXHIBIT 10 AVERAGE ANNUAL PRODUCTIVITYGROWTH, SELECTED COUNTRIES: 1990–2005

Source: Council of Economic Advisers, Economic Report of the President, 2007 (Washington, D.C.: U.S. Government Printing Office, 2007).

Exhibit 10: Average Annual Exhibit 10: Average Annual Productivity Growth, Selected Productivity Growth, Selected

Countries: 1990–2005Countries: 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.


EXHIBIT 11 SOURCES OF LABOR PRODUCTIVITYGROWTH: 1990–2005


Exhibit 11: Sources of Labor Exhibit 11: Sources of Labor Productivity Growth: 1990–2005Productivity 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


EXHIBIT 12 REAL GDP AND ANNUAL RATE OF GDPGROWTH: 1990–2005 (billions 2000 $ and percent)


Exhibit 12: Real GDP and Annual Exhibit 12: Real GDP and Annual Rate of GDP Growth: 1990–2005 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.

How Economics Growth Affects How Economics Growth Affects Your LifeYour 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..


EXHIBIT 13 COST OF AQUIRING A 3-POUND CHICKEN

While the money price of a 3-pound fryer has risen from $1.23 in 1919 to $3.15 today, its real price—work time—has fallen from 2 hours 37 minutes to just 14 minutes.

Exhibit 13: Cost of Acquiring a Exhibit 13: Cost of Acquiring a 3-Pound Chicken3-Pound Chicken


In terms of dollar cost, your great-grandparents in 1919 bought a chicken for $1.13. You paid $3.15 for it in 1997. Have costs really tripled? Were your great-grandparents that much better off?• The gains of economic growth is masked by the use

of “dollar value.” Instead of dollars, calculate the number of minutes of a day’s work it takes to buy that chicken.


EXHIBIT 14 SELECTED GOODS, IN MINUTES OR HOURSOF WORK TIME: THEN AND NOW

Source: W. Michael Cox and Richard Alm, Time Well Spent, Federal Reserve Bank of Dallas, Annual Report, 1997, pp. 2–14.

Exhibit 14: Selected Goods, in Exhibit 14: Selected Goods, in Minutes or Hours of Work TimeMinutes or Hours of Work Time


While a double-decker hamburger cost’s less now, women’s haircuts are actually more expensive today than in 1920. New homes are only slightly less costly. Why?• The explanation is due to the labor intensity of their

production.


EXHIBIT 15 PERCENTAGE OF HOUSEHOLDS ENJOYINGTHE BOUNTY OF ECONOMIC GROWTH

Exhibit 15: Percentage of Exhibit 15: Percentage of Households Enjoying the Households Enjoying the

Bounty of Economic GrowthBounty of Economic Growth


What is the most recent evidence of economic growth to have achieved an over 90 percent presence in U.S. households?

a. Computer

b. Wireless phone

c. Microwave oven

Exhibit 15: Percentage of Exhibit 15: Percentage of Households Enjoying the Households Enjoying the

Bounty of Economic GrowthBounty of Economic Growth


What is the most recent evidence of economic growth to have achieved an over 90 percent presence in U.S. households?

a. Microwave oven

b. Wireless phone

c. Computer

chapter 24 long-run economic growth gottheil — principles of economics, 6e © 2010 cengage...

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