CH 28

CHAPTER 28
Long-Run Growth
Prepared by: Fernando Quijano and

Yvonn Quijano
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Economic Growth
• Economic growth refers to an increase in

the total output of an economy. Defined
by some economists as the increase of
real GDP per capita.
• Modern economic growth is the period
of rapid and sustained increase in real
output per capita that began in the
Western World with the Industrial
Revolution.
Economic Growth
• 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 shifts
society’s production
possibility frontier up and
to the right.
The Growth Process:
From Agriculture to Industry
• Before the Industrial Revolution in Great
Britain, every society in the world was
agrarian.
• Beginning in England around 1750,
technical change and capital accumulation
increased productivity in two important
industries: agriculture and textiles.
• More could be produced with fewer
resources, leading to new products, more
output, and wider choice.
The Sources of Economic Growth
• An aggregate production function is the

mathematical representation of the
relationship between inputs and national
output, or gross domestic product.
• If you think of GDP as a function of both
labor and capital, you can see that an
increase in GDP can come about through:
1. An increase in the labor supply
2. An increase in physical or human capital
3. An increase in productivity
An Increase in Labor Supply
• An increasing labor supply can generate

more output, but if the capital stock
remains fixed, the new labor will be less
productive (diminishing returns).
• Malthus and Ricardo predicted a gloomy
future as population outstripped the land’s
capacity to produce. However, they forgot
the impact of technological change and
capital accumulation.
Economic Growth From
an Increase in Labor
• Growth in the labor force, without a corresponding
increase in the capital stock or technological change
might lead to growth of output but declining productivity.
Economic Growth from an Increase in Labor – More Output but
Diminishing Returns and Lower Labor Productivity
QUANTITY QUANTITY TOTAL MEASURED
OF LABOR OF CAPITAL OUTPUT LABOR
L K Y PRODUCTIVITY
PERIOD (HOURS) (UNITS) (UNITS) Y/L
1 100 100 300 3.0
2 110 100 320 2.9
3 120 100 339 2.8
4 130 100 357 2.7
Economic Growth From
an Increase in Labor
Employment, Labor Force, and Population Growth, 1947 – 1999
CIVILIAN CIVILIAN
NONINSTITUTIONAL LABOR
POPULATION FORCE
OVER 16 YEARS Number Percentage EMPLOYMENT
OLD (Millions) of Population (MILLIONS)
(MILLIONS)
1947 101.8 59.4 58.3 57.0
1960 117.3 69.6 59.3 65.8
1970 137.1 82.8 60.4 78.7
1980 167.7 106.9 63.7 99.3
1990 189.2 125.8 66.5 118.8
1999 207.8 139.4 67.1 133.5
Percentage change, 1947 – 1999 + 104.1 + 134.7 + 134.2

Annual rate + 1.4% +1.7% + 1.7%
Source: Economic Report of the President, 2000, Table B-33.
Increases in Physical Capital
• An increase in the stock of capital can increase

output, even if it is not accompanied by an
increase in the labor force.
Economic Growth from an Increase in Capital – More Output, Diminishing
Returns to Added Capital, Higher Measured Labor Productivity
QUANTITY QUANTITY TOTAL MEASURED
OF LABOR OF CAPITAL OUTPUT LABOR
L K Y PRODUCTIVITY
PERIOD (HOURS) (UNITS) (UNITS) Y/L
1 100 100 300 3.0
2 100 110 310 3.1
3 100 120 319 3.2
4 100 130 327 3.3
• The increase in capital stock is the

difference between gross investment and
depreciation.
• Capital has been increasing faster than
the labor force since 1960. When capital
expands more rapidly than labor, the ratio
of capital to labor (K/L) increases, and this
too is a source of increasing productivity.
Fixed Private Nonresidential Net Capital Stock, 1960 – 1998

(Billions of 1996 Dollars)
EQUIPMENT STRUCTURES
1960 672.5 2,047.7
1970 954.2 2,788.3
1980 1,988.9 3,646.3
1990 2,721.0 4,778.6
1998 3,797.3 5,389.2
Percentage change, 1960 – 1998 + 464.7 + 163.2

Annual rate + 4.7% + 2.6%
Source: Survey of Current Business, April 2000, computed from Tables 1 and 2, p. 21.
Increases in Human Capital
Years of School Completed by People Over 25 Years Old, 1940 – 1998

PERCENTAGE
WITH LESS PERCENTAGE PERCENTAGE
THAN 5 WITH 4 YEARS WITH 4 YEARS
YEARS OF OF HIGH SCHOOL OF COLLEGE
SCHOOL OR MORE OR MORE
1940 13.7 24.5 4.6
1950 11.1 34.3 6.2
1960 8.3 41.1 7.7
1970 5.5 52.3 10.7
1980 3.6 66.5 16.2
1990 NA 77.6 21.3
1998 NA 82.8 24.4
NA = not available.
Source: Statistical Abstract of the United States, 1990,
1990, Table 215; and 1999, Table 263.
Increases in Productivity
• Growth that cannot be explained by

increases in the quantity of inputs can be
explained only by an increase in the
productivity of those inputs.
• The productivity of an input is the
amount produced per unit of an input.
• Factors that affect the productivity of an
input include technological change, other
advances in knowledge, and economies of
scale.
• Technological change affects productivity

in two stages:
• First there is an advance in knowledge, or an
invention.
• Then there is innovation, or the use of new
knowledge to produce a new product or to
produce an existing product more efficiently.
• There are capital-saving innovations, and
labor-saving innovations.
• External economies of scale are cost

savings that result from increases in the
size of industries.
• Production abatement requirements
divert capital and labor from the
production of measured output, therefore
reducing measured productivity.
Growth and Output in the United States
Growth of Real GDP in the United States, 1871 – 1999
AVERAGE AVERAGE
GROWTH GROWTH
RATE RATE
PERIOD PER YEAR PERIOD PER YEAR
1871-1889 5.5 1950-1960 3.5
1889-1909 4.0 1960-1970 4.2
1909-1929 2.8 1970-1980 3.2
1929-1940 1.6 1980-1990 3.2
1940-1950 5.6 1990-1999 3.1

Sources: Historical Statistics of the United States: Colonial Times to 1970,
1970, Tables F47-70, F98-124; U.S. Department of Commerce, Bureau of
Economic Analysis.
Growth and Output in the United States
Growth of Real GDP in the United States and

Other Countries, 1981 – 1998
AVERAGE
GROWTH RATE
COUNTRY PER YEAR
United States 3.1
Japan 2.8
Germany 2.1
France 2.0
Italy 1.8
United Kingdom 2.4
Canada 2.5
Africa 2.5
Asia (excluding Japan) 7.3
Source: Economic Report of the President, 2000,
2000, computed from Table B-110.
Sources of Growth in the U.S.
Economy, 1929 – 1982
Sources of Growth in the United States, 1929 – 1982
PERCENT OF GROWTH ATTRIBUTABLE TO EACH SOURCE
1929 – 1982 1929 – 1948 1948 – 1973 1973 – 1979

Increases in inputs 53 49 45 94
Labor 20 26 14 47
Capital 14 3 16 29
Education (human capital) 19 20 15 18
Increases in productivity 47 51 55 6
Advances in knowledge 31 30 39 8
Other factorsa 16 21 16 2
Annual growth rate 2.8 2.4 3.6 2.6

in real national
income
Economies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
a
Source: Edward Denison, Trends in American Economic Growth, 1929 – 1982 (Washington: Brookings Institution, 1985).
Labor Productivity, 1952 – 2000
Labor Productivity, 1952 – 2000
• Some of the explanations for the slowdown

in productivity growth in the 1970s include:
• a low rate of saving
• increased environmental and government
regulations
• lack of spending in R&D
• high energy costs
• However, many of these factors turned

around in the 1980s and 1990s yet
productivity growth remained low.
Economic Growth and Public Policy
• Policy provisions to improve the quality of

education include the new Education
Individual Retirement Account that allows
savings to earn tax free returns as long as
the balance is used to pay for educational
expenses.
• Policies to increase the saving rate
include individual retirement accounts that
accumulate earnings without paying
income tax.
• The amount of capital accumulation is

ultimately constrained by its rate of saving.
• The tax system and the social security
system in the United States are biased
against saving.
• Some public finance economists favor
shifting to a system of consumption
taxation rather than income taxation to
reduce the tax burden on saving.
• Other public policies to stimulate

economic growth include:
• policies to stimulate investment
• policies to increase research and development
• reduced regulations
• industrial policy, or government involvement
in the allocation of capital across
manufacturing sectors.
The Pro-Growth Argument
• Advocates of growth believe growth is

progress.
• New technologies and production
methods lead to new and better products.
Capital accumulation and new technology
improve the quality of life.
• In 1995, real GDP per capita was more
than twice what it was in 1950. Since the
1950s, incomes have grown twice as fast
as prices.
• Advocates of growth believe growth is

progress.
• Growth gives us more choices.
• New technologies and production
methods lead to new and better products.
Capital accumulation and new technology
improve the quality of life.
• Since the 1950s, incomes have grown
twice as fast as prices so we can buy that
much more.
• Growth saves the most valuable

commodity—time.
• Growth also improves the quality of things
that yield satisfaction directly.
• Growth produces jobs and higher incomes.
With higher incomes we can better afford
the sacrifices needed to help the poor.
• When population growth is not
accompanied by growth in output,
unemployment and poverty increase.
The Anti-Growth Argument
• Growth has negative effects on the quality

of life.
• Growth encourages the creation of
artificial needs.
• Growth means the rapid depletion of a
finite quantity of resources.
• Growth requires an unfair income
distribution and propagates it.

CH 28

Uploaded by

Copyright:

Available Formats

CH 28

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 28

Uploaded by

Copyright:

Available Formats

CHAPTER 28

Prepared by: Fernando Quijano and

• Economic growth refers to an increase in

• The production possibility

• An aggregate production function is the

• An increasing labor supply can generate

1999 207.8 139.4 67.1 133.5

Percentage change, 1947 – 1999 + 104.1 + 134.7 + 134.2

• An increase in the stock of capital can increase

• The increase in capital stock is the

Fixed Private Nonresidential Net Capital Stock, 1960 – 1998

Percentage change, 1960 – 1998 + 464.7 + 163.2

Years of School Completed by People Over 25 Years Old, 1940 – 1998

• Growth that cannot be explained by

• Technological change affects productivity

• External economies of scale are cost

Growth of Real GDP in the United States, 1871 – 1999

1889-1909 4.0 1960-1970 4.2

1909-1929 2.8 1970-1980 3.2

1929-1940 1.6 1980-1990 3.2

1940-1950 5.6 1990-1999 3.1

Growth of Real GDP in the United States and

1929 – 1982 1929 – 1948 1948 – 1973 1973 – 1979

Annual growth rate 2.8 2.4 3.6 2.6

• Some of the explanations for the slowdown

• However, many of these factors turned

• Policy provisions to improve the quality of

• The amount of capital accumulation is

• Other public policies to stimulate

• Advocates of growth believe growth is

• Advocates of growth believe growth is

• Growth saves the most valuable

• Growth has negative effects on the quality

You might also like