Principles of macroeconomics 10e by case fair oster ch17

labor productivity growth The growth rate of output per worker... Higher productivity comes from tools physical capital; a better-educated and The Growth Process: From Agriculture to I

Disembodied Technical Change More on Technical Change U.S Labor Productivity: 1952 I–2010 I

Growth and the Environment and Issues of Sustainability

output growth The growth rate of the

output of the entire economy

per-capita output growth The growth

rate of output per person in the economy

labor productivity growth The growth

rate of output per worker

The production possibility frontier

shows all the combinations of output

that can be produced if all society’s

scarce resources are fully and

efficiently employed.

Economic growth expands society’s

production possibilities, shifting the

ppf up and to the right

 FIGURE 17.1 Economic Growth Shifts

Society’s Production Possibility Frontier

Up and To the Right

The Growth Process: From Agriculture to Industry

Beginning in England around 1750, technical change and capital accumulation

increased productivity significantly in two important industries: agriculture and

textiles

New inventions and new machinery meant that more could be produced with

fewer resources

Growth meant new products, more output, and wider choice

A rural agrarian society was quickly transformed into an urban industrial

society

Economic growth continues today in the developed world, and while the

underlying process is still the same, the face is different

Growth comes from a bigger workforce and more productive workers

Higher productivity comes from tools (physical capital); a better-educated and

The Growth Process: From Agriculture to Industry

a Technical change and capital accumulation.

b New and more efficient methods of farming

c New inventions and new machinery

d All of the above

a Technical change and capital accumulation.

b New and more efficient methods of farming

c New inventions and new machinery

The Growth Process: From Agriculture to Industry

developed countries will exceed the growth rates of developed countries, allowing the less developed countries to catch up

This idea that gaps in national incomes tend to close over time is called

convergence theory

An economic historian coined the term the advantages of backwardness over

50 years ago to describe the phenomenon of less developed countries leaping

ahead by borrowing technology from more developed countries

aggregate production function A mathematical relationship

stating that total GDP (output) depends on the total amount of labor used and the total amount of capital used

Sources of Economic Growth

The numbers that are used in Tables 17.2 and 17.4 that follow are based on

the simple production function

Y = 3 × K1/3L2/3

Both capital and labor are needed for production and increases in either result

in more output

Using this construct we can now explore exactly how an economy achieves

higher output levels over time as it experiences changes in labor and capital

TABLE 17.2 Economic Growth from an Increase in Labor—More Output but

Diminishing Returns and Lower Labor Productivity

Y

Labor Productivity

Sources of Economic Growth

Increase in Labor Supply

16 and Over (Millions)

Civilian Labor Force

Employment (Millions)

Number (Millions)

Sources of Economic Growth

Increase in Labor Supply

In order for economic growth to increase the standard of living:

a The rate of output growth must exceed the rate of population

increase

b Income must be distributed equally

c The government must practice industrial policy

d Citizens must experience improvements in the quality of life

In order for economic growth to increase the standard of living:

increase.

b Income must be distributed equally

c The government must practice industrial policy

d Citizens must experience improvements in the quality of life

TABLE 17.4 Economic Growth from an Increase in Capital—More Output, Diminishing

Returns to Added Capital, Higher Labor Productivity

Y

Labor Productivity

Sources of Economic Growth

Increase in Physical Capital

Sources of Economic Growth

Increase in Physical Capital

TABLE 17.6 Years of School Completed by People Over 25 Years Old, 1940–2008

Percentage with Less than 5 Years of School

Percentage with 4 Years of High School

or More

Percentage with 4 Years of College

Sources of Economic Growth

Increase in the Quality of the Labor Supply (Human Capital)

An increase in GDP can come about through:

a An increase in the labor supply

b An increase in physical or human capital

c An increase in productivity (the amount of product produced by

each unit of capital or labor)

d All of the above

An increase in GDP can come about through:

a An increase in the labor supply

b An increase in physical or human capital

c An increase in productivity (the amount of product produced by

each unit of capital or labor)

education and health care

to boost labor productivity,

the context is often the

developing economies,

where the overall level of

health and education are

low

Developed economies like

the United Kingdom are

also concerned about the

skill level of their labor

force as they contemplate their productivity and growth rates

Education and Skills in the United Kingdom

E C O N O M I C S I N P R A C T I C E

U.K Businesses Press for Focus on Skills

Sources of Economic Growth

Increase in the Quality of Capital (Embodied Technical Change)

embodied technical change Technical change that

results in an improvement in the quality of capital

Disembodied Technical Change

disembodied technical change Technical change that

results in a change in the production process

invention An advance in knowledge.

innovation The use of new knowledge to produce a new

product or to produce an existing product more efficiently

More on Technical Change

Sources of Economic Growth

U.S Labor Productivity: 1952 I–2010 I

The accumulation of capital in an economy is ultimately constrained by:

a The rate of saving

b The rate of spending relative to income growth

c Depreciation

d Government spending and taxation

The accumulation of capital in an economy is ultimately constrained by:

b The rate of spending relative to income growth

c Depreciation

d Government spending and taxation

TABLE 17.7 Environmental Scores in the

World Bank Country Policy and Institutional Assessment

2005 Scores (min = 1, max = 6)

Urban Air Pollution

Growth and the Environment and Issues of Sustainability

Much of Southeast Asia has fueled its growth through export-led manufacturing

For countries that have based their growth on resource extraction, there is

another set of potential sustainability issues

Because extraction can be accomplished without a well-educated labor force,

while other forms of development are more dependent on a skilled-labor base,

public investment in infrastructure is especially important

Growth and the Environment and Issues of Sustainability

inventionlabor productivity growthoutput growth

per-capita output growth

R E V I E W T E R M S A N D C O N C E P T S