+ Economic Growth Chapter 20 Average daily caloric consumption  Not only has the number of calories consumer per day increased, so has the amount of food calories that people are able to afford based on their working wages (Credit: modification of work by Lauren Manning/Flickr Creative Commons) + Chapter Outline  Labor Productivity and Economic Growth  Components of Economic Growth  Economic Convergence + Recent Economic Growth  modern economic growth: spectacular patterns of economic growth around the world in the last two centuries, commonly referred to as the period of modern economic growth  the average person’s standard of living had not changed much for centuries  Industrial Revolution: the widespread use of power-driven machinery and the economic and social changes that resulted in the first half of the 1800s  The new jobs of the Industrial Revolution typically offered higher pay and a chance for social mobility The Industrial Revolution led to increasing inequality among nations + Factors of economic growth adherence to the rule of law protection of property rights and contractual rights by a country’s government so that markets can work effectively and efficiently  If above holds true, legal system considered to be effective (World Bank)  Ranks effectiveness: World average ranking – 2.9  Lowest ranked countries – 1.5 (Afghanistan, Zimbabwe, Central African Republic) + Labor productivity and economic growth  Labor productivity is the value that each employed person creates per unit of his or her input    Can more in the same time Determinants of labor productivity: Human capital - the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses Technological change - combination of invention—advances in knowledge—and innovation, which is putting that advance to use in a new product or service Economies of scale – cost advantages due to size Production function - the process of turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers + Aggregate Production Functions  An aggregate production function shows what goes into producing the output for an overall economy (a) This aggregate production function has GDP as its output (b) This aggregate production function has GDP per capita as its output Because it is calculated on a per-person basis, the labor input is already figured into the other factors and does not need to be listed separately Output per hour worked, US  Output per hour worked is a measure of worker productivity In the U.S economy, worker productivity rose more quickly in the 1960s and the mid-1990s compared with the 1970s and 1980s However, these growth-rate differences are only a few percentage points per year Look carefully to see them in the changing slope of the line The average U.S worker produced nearly $105 per hour in 2012 (Source: U.S Department of Labor, Bureau of Labor Statistics.) Productivity growth  Some think the productivity rebound of the late 1990s and early 2000s marks the start of a “new economy” built on higher productivity growth, but this cannot be determined until more time has passed (Source: U.S Department of Labor, Bureau of Labor Statistics.) + “New Economy” Controversy  Resurgence of US productivity in the second half of 1990s  Either start of higher average productivity for decades, or  Just a short-term boost  Sustained economic growth very important for people’s standard of living  even a few percentage points of difference in economic growth rates will have a profound effect if sustained and compounded over time + Components of economic growth Physical capital - plant and equipment used by firms and also things like roads (also called infrastructure)  Greater physical capital implies more output Human capital – increased investment leads to higher long-term productivity Technology - comprises all the advances that make the existing machines and other inputs produce more, and at higher quality, as well as altogether new products  Capital deepening – increases in the level of capital per person  E.g average levels of education Human capital deepening: US  Rising levels of education for persons 25 and older show the deepening of human capital in the U.S economy Even today, relatively few U.S adults have completed a four-year college degree There is clearly room for additional deepening of human capital to occur (Source: US Department of Education, National Center for Education Statistics) Physical capital deepening  The value of the physical capital, measured by plant and equipment, used by the average worker in the U.S economy has risen over the decades The increase may have leveled off a bit in the 1970s and 1980s, which were not, coincidentally, times of slower-than-usual growth in worker productivity We see a renewed increase in physical capital per worker in the late 1990s, followed by a flattening in the early 2000s (Source: Center for International Comparisons of Production, Income and Prices, University of Pennsylvania) + Growth accounting  Technology is the most important contributor to US economic growth  Investment in physical capital is essential to growth in labor productivity and GDP per capita, building human capital is at least as important  Three factors of human capital, physical capital, and technology work together + Economic Convergence  Convergence – low-income countries’ economies grow faster than those of high-income countries + Favoring convergence  Diminishing marginal returns – marginal gains from human and physical capital decreases  Lower-income countries have higher marginal gains  LIC easier to improve technology  Lessons learned + Against convergence  Improving technology avoids declining marginal returns of capital deepening Figure 20.7  Imagine that the economy starts at point R, with the level of physical and human capital C and the output per capita at G1 If the economy relies only on capital deepening, while remaining at the technology level shown by the Technology line, then it would face diminishing marginal returns as it moved from point R to point U to point W However, now imagine that capital deepening is combined with improvements in technology Then, as capital deepens from C1 to C2, technology improves from Technology to Technology 2, and the economy moves from R to S Similarly, as capital deepens from C to C3, technology increases from Technology to Technology 3, and the economy moves from S to T With improvements in technology, there is no longer any reason that economic growth must necessarily slow down + Questions? ... (Source: U.S Department of Labor, Bureau of Labor Statistics.) + “New Economy” Controversy  Resurgence of US productivity in the second half of 1990s  Either start of higher average productivity for... people’s standard of living  even a few percentage points of difference in economic growth rates will have a profound effect if sustained and compounded over time + Components of economic growth... increases in the level of capital per person  E.g average levels of education Human capital deepening: US  Rising levels of education for persons 25 and older show the deepening of human capital