1 Productivity and Growth CHAPTER 21 © 2003 South-Western/Thomson Learning.
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Transcript of 1 Productivity and Growth CHAPTER 21 © 2003 South-Western/Thomson Learning.
2
Standard of Living
Economy’s standard of living as measured by the amount of goods and services available per person grows over the long run because of
increases in the amount and quality of resources, especially labor and capitalbetter technologyimprovements in the rules of the game that facilitate production and exchange• tax laws• property rights• patent laws• legal system
3
Growth and the PPFRecall that the production possibilities frontier – PPF – shows alternative combinations of goods that an economy can produce if available resources are used efficiently
See Exhibit 1Quantity of resources in the economy fixedLevel of technology fixedRules of the game remain fixedTwo broad categories of goods – consumer goods and capital goods
4
Exhibit 1: Economic Growth
When resources are employed efficiently, CI in each of the panels shows the possible combinations of consumer goods and capital goods that can be produced in a given year
Points C and I depict the quantity of consumer and capital goods produced if all resources are used to produce that good, respectively
Economic growth is an outward shift of the PPF in each of the two panels
5
Economic GrowthCauses of economic growth
Increase in the availability of resourcesGrowth in the labor supply • Population increases• Existing population supplies more labor
Growth in the capital stock• The more capital goods produced this year, the
more the economy will grow
Improvement in Technology• Expand the frontier by making more efficient
use of existing resources
Improvements in the Rules of the game • Improvements that nurture production and
exchange will promote growth
6
Exhibit 1: Capital Produced and Growth
The amount of capital produced this year will affect the location of the PPF next year
In the left panel, the economy has chosen point A from the possible combinations which shifts the PPF from CI this year
to C'I' next year However, if more capital goods are produced this year, as reflected by point B in the right panel, the PPF will shift outward farther next year to C"I"
Thus, an economy that invests more in capital – gives up more consumer goods – will experience larger economic growth
7
What is Productivity?
Production is a process that transforms resources into productsProductivity
measures how efficiently resources are employedthe higher the productivity, the more goods and services that can be produced from a given amount of resources the farther out will be the PPFdefined as the ratio of total output to a specific measure of inputtotal output divided by the amount of a particular kind of resource employed
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Labor ProductivityOutput per unit of labor and measures total output divided by the hours of labor employed to produce that output
Most commonly used resource to measure productivity
Accounts for a relatively large share of the cost of production – 70% on averageMore easily measured than other inputsCan be measured as hours per week or full-time workers per year
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Labor Productivity
The resource most responsible for increasing labor productivity is capital
As the economy accumulates more capital per worker, labor productivity increases standard of living increases
Two broad categories of capitalHuman Capital• Accumulated knowledge, skill, and experience of
the labor force• As individual workers acquire more human
capital, their productivity and income increase
Physical Capital• Includes the machines, buildings, roads, airports,
communication networks and other manufactured creations used to produce goods and services
10
Exhibit 2: Per-Worker Production Function
y
k
PF
0Capital per worker
Expresses the relationship between the amount of capital per worker (horizontal axis) and the output per worker (vertical axis), other things constant (level of technology and the rules of the game)
Any point on the production function, PF, shows how much output per worker can be produced for a given amount of capital per worker
When there are k units of capital per worker, average output per worker in the economy is y
Upward slope of the curve occurs because an increase in capital per worker helps each worker produce more output
Ou
tpu
t p
er w
ork
er
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Per Worker Production Function
The shape of the per-worker production function reflects the law of diminishing marginal returns
When applied to capital says that the more capital per worker there is already, the less additional output can be gained by increasing capital stock per worker even more
An increase in the amount of capital per worker is called capital capital deepeningdeepening and is one source of rising labor productivity economic growth
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Exhibit 3: Impact of a Technological Breakthrough
k
Ou
t pu
t p
er
wo
r ke
ry
0Capital per worker
PFy'
PF'Technological change usually improves the quality of capital and increases productivity, shown by the upward rotation from PF to PF' more output is produced at each level of capital per worker
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Economic GrowthTwo kinds of changes in capital improve worker productivity
An increase in the quantity of capital per worker• is reflected by a movement along the per-worker
production function• According to Simon Kuznets, changes in the
quantities of labor and capital account for only one-tenth of the increase in economic growth
An improvement in the quality of capital per worker • is reflected by technological change that rotates
the curve upward• Accounts for nine-tenths of the increase in
economic growth• As technological breakthroughs become
embodied in new capital, resources are combined in more efficient ways
14
Rules of the GameRefers to the formal and informal institutions that promote economic activity
Laws, customs, conventions, and other institutional elements that encourage people to undertake productive activityStable political environment and system of well-defined property rights
Improvements in the rules of the game could result in more output for each level of capital upward rotation in the per-worker production function
15
Productivity / Growth in Practice
Differences in the standard of living among countries are profound
Per capita output in the U.S. is more than fifty times that of the world’s poorest countriesWith only 5% of the world’s population, the U.S. produces more than all the nations comprising the bottom 50% of the world’s population put together
World’s economies can be sorted into two broad groups
Industrial market countries or developed countriesDeveloping or third-world countries
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Industrial market countries
Developed countries which make up about 20% of the world’s population
Economically advanced capitalistic countries
Western Europe, North America, Australia, New Zealand, and Japan
Were the first to experience long-term economic growth and have the highest standard of living
17
Developing Countries
80% of the world’s population
Have a lower standard of living because of relatively less human and physical capital
On average, the majority of workers in these countries are employed in agriculture
18
Education and Economic Development
Important source of productivity is the quality of labor
What exactly is the contribution of education to the process of economic development
Education makes workers aware of the latest production techniquesMakes workers more receptive to new ideas and methodsCountries with the most advanced educational systems were first to develop while developing economies have far lower levels of education
19
Source: Angus Maddison, Phases of Capitalist Development (New York; Oxford University Press, 1982) and Bureau of Labor Statistics. “Since 1990” includes 2000 and 2001.
Exhibit 5: Long-Term Trends in Labor Productivity (Annual Averages by Decade)
Average productivity growth since 1870 is 2.1%
20
Exhibit 6: U.S. Labor Productivity Growth Slowed During 1974-1982, then Rebounded
Growth in labor productivity declined from an average of 2.9% per year between 1948 to 1973 to 0.8% in 1974 to 1982
Causes of slowdown: (1) increase in the price of oil between 1973 and 1974(2) in the early 1970s environmental and safety laws required more costly production methods
Rebound during the later years is directly related to the information revolution powered by the computer chip
2.9
0.8
1.7
2.3
0
0.5
1
1.5
2
2.5
3
1948-1973 1974-1982 1983-1995 1996-2001
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Output Per Capita
Even if labor productivity did not increase, total output would grow if the quantity of labor increased
Labor productivity equals real GDP divided by the quantity of labor real GDP equals labor productivity times the quantity of labor
Therefore total output can grow as a result of greater labor productivity, more labor, or both
22
Output Per CapitaOutput per capita
Real GDP divided by the populationBest measure of economy’s standard of livingIndicates how much an economy produces on average per person
Relationship between output per capita and labor productivity
Suppose labor productivity is $60,000 per worker per yearIf there is one worker for every two people in the economy, then output per capital equals output per worker divided by 2 $60,000 / 2 = $30,000
23
Output Per Capita
Output will increase iflabor productivity increases for a given worker-population ratiothe worker-population ratio increases for given labor productivitylabor productivity and the worker-population both increase
In fact, output per capita would increase as long as an increase in one of these three factors more than offsets any decrease in the other two
24Source: U.S. Dept. of Commerce, Survey of Current Business, 81 (July, 2001).
Exhibit 7: Real GDP Per Capita
Despite the six recessions indicated by the shading, real GDP per capita measured in 1996 dollars has nearly tripled, for an average growth rate of 2.3%
25
International Comparisons
0
1
1
2
2
3
U.S. U.K. Italy ermany Japan Canada France
Exhibit 9: U.S. Real GDP Per Capita Outgrew Other Major Economies Since
1983
Ave
rage
An
nu
al P
erce
nt
Gro
wth
Sin
ce 1
983
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
U.S. Canada Japan Germany Italy U.K. France
Exhibit 8: U.S. Real GDP Per Capita Is Tops Among Major Economies
Con
vert
ed t
o U
.S. D
olla
rs
26
Technological Change and Unemployment
Technological change usually reduces the number of workers needed to produce a given amount of output
Therefore, some fear that new technology will throw people out of work and lead to higher unemployment
However, it is also true that technological change can also increase production and employment by making products more affordable
27
Technological Change and Unemployment
If technological change caused unemployment
Then the slowdown in productivity growth that occurred from 1974 to 1982 should have resulted in lower unemployment than during the period of higher productivity growth from 1996 to 2001In fact, the unemployment rate during the former period was much higher than in the latter periodAlso, if this argument were true, we should expect unemployment rates should be lower in the developing countries. Again, this is not borne out by the facts
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Research and DevelopmentImprovements in technology arise from scientific discovery, which is the fruit of researchWe can distinguish between
Basic research• Search for knowledge without regard to how
that knowledge will be used• First step toward technological
advancement• Less immediate payoff yet yields a higher
rate of return to society as a whole
Applied research• Seeks to answer particular questions or to
apply scientific knowledge to the development of specific products
29
Research and DevelopmentSince technological change is the fruit of research and development (R&D), investment in R&D reflects the economy’s efforts to improve productivity
One way to track R&D spending is to measure it relative to GDP
During the 1990s, R&D as a share of GDP in the U.S. ranked second among the major economies, behind only Japan
30
Research and DevelopmentBusiness R&D is more likely to be targeted toward applied research and innovations
Averaged 1.9% of GDP in the 1990sOnly Japan had higher business R&D than the U.S.
R&D spending by governments and nonprofits may generate basic knowledge that has specific applications in the long run
For example, the Internet sprang from R&D spending on national defense
32
Convergence Theory
Will poor countries eventually catch up with rich ones?
Convergence theoryConvergence theory argues that developing countries can grow faster than advanced ones should eventually close the gap
It is easier to copy new technology once it is developed than to develop new technologyThus countries that start out far behind can grow faster by copying technology
33
Convergence TheoryWhat’s the evidence on convergence?
Some poor countries have begun to catch up with the richer ones• Newly industrialized Asian economies of Hong
Kong, Singapore, South Korea, and Taiwan• However, these “Asian Tigers” are more the
exception than the rule
Among the nations that comprise the poorest third of the world’s population, consumption per capita has grown significantly slower than in the rest of the world the standard of living in these countries has fallen farther behind in relative terms
34
Convergence TheoryReasons why the poorest countries have not gained
Birth rates are nearly double those in richer ones the poor economies must produce still more just to keep up with a growing populationVast differences in the quality of human capital across countries• While technology may be portable, the
knowledge, skill, and training required to take advantage of this technology may not be
Some countries lack the stable macroeconomic environment, established institutions, and infrastructures needed to nurture economic growth
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Industrial Policy
Two concerns with respect to technologies of the future
They will require huge sums to develop and implement and firms may not easily raise or put at risk these large sumsSome technological breakthroughs spill over to other firms and other industries; thus the firm that develops the breakthrough may not be in a position to reap benefits from these spillover effects individual firms may under-invest in such research
36
Industrial Policy
One possible solution to these two problems was more government involvement through industrial policyIndustrial policy
Idea that government, using taxes, subsidies, regulations, and coordination in the private sector, could help nurture the industries and technologies of the future Gives domestic industries and advantage over foreign competition with the objective one of securing a leading global role for domestic industries