Prs Macroch17 9e

PowerPoint Lectures for
Principles of
Macroeconomics, 9e
CHAPTER 17 Long-Run Growth
; ;
2009 Pearson Education, Inc. Publishing as Prentice Hall
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
Principles of Macroeconomics 9e by Case, Fair and Oster
1 of 39

2 of 39
PART IV FURTHER MACROECONOMICS ISSUES
17
Long-Run Growth
Prepared by:
Fernando & Yvonn Quijano
PART IV FURTHER MACROECONOMICS ISSUES
Long-Run Growth
17
CHAPTER OUTLINE
The Growth Process: From Agriculture
to Industry
The Sources of Economic Growth

An Increase in Labor Supply
Increases in Physical Capital
Increases in Human Capital
Increases in Productivity
Growth and Productivity in the United

States
Sources of Growth in the U.S. Economy:
19291982
Labor Productivity: 1952 I2007 IV
Economic Growth and Public Policy in
the United States The Size of the
Multiplier
Suggested Public Policies
Growth and the Environment and Issues
of Sustainability
4 of 39
Long-Run Growth
economic growth An increase in the total

output of an economy.
modern economic growth The period of

rapid and sustained increase in output that
began in the Western world with the Industrial
Revolution.
5 of 39
The Growth Process: From Agriculture to Industry
FIGURE 17.1 Economic

Growth Shifts Societys Production
Possibility Frontier Up and to the
Right
The production possibility frontier
shows all the combinations of
output that can be produced if all
societys scarce resources are
fully and efficiently employed.
Economic growth expands
societys production possibilities,
shifting the ppf up and to the right.
6 of 39

From Agriculture to Industry: The Industrial Revolution
Beginning in England around 1750, technical

change and capital accumulation increased
productivity significantly in two important
industries: agriculture and textiles.
More could be produced with fewer resources,
leading to new products, more output, and wider
choice.
A rural agrarian society was very quickly
transformed into an urban industrial society.
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Among the sources of increased productivity and growth in England

around 1750 was:
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.
8 of 39
Among the sources of increased productivity and growth in England

around 1750 was:
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.
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Growth in Modern Society
Economic growth continues today, 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 (capital), a better-educated and more
highly skilled workforce (human capital), and
increasingly from innovation and technical change
(new techniques of production) and newly
developed products and services.
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Growth Patterns and the Possibility of Catch-Up
TABLE 17.1 Growth of Real GDP: 1999-2007
Average Growth Rate
Per Year, 1999-2007
Country
United States
2.7
Japan
1.5
Germany
1.5
France
2.1
United Kingdom
2.7
China
9.6
India
7.0
Africa (continent)
4.5
Republic of South Africa (2002-2007)
3.9
Cameroon (2002-2007)
4.0
Zimbabwe (2007-2007)
1.0
Source: Economic Report of the President, 2008.
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Growth Patterns and the Possibility of Catch-Up
catch-up The theory stating that the growth rates

of less developed countries will exceed the growth
rates of developed countries, allowing the less
developed countries to catch up.
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aggregate production function The

mathematical representation of the relationship
between inputs and national output, or gross
domestic product.
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 (the amount of

product produced by each unit of capital or
labor).
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labor productivity Output per worker hour; the

amount of output produced by an average worker
in 1 hour.
TABLE 17.2 Economic Growth from an Increase in LaborMore Output but

Diminishing Returns and Lower Labor Productivity
Period
Quantity
Of Labor
L
(Hours)
Quantity
Of Capital
K
(Units)
Total
Output
Y
(Units)
Measured
Labor
Productivity
Y/L
1
2
3
4
100
110
120
130
100
100
100
100
300
320
339
357
3.0
2.9
2.8
2.7
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TABLE 17.3 Employment, Labor Force, and Population Growth, 19472007

Civilian
Civilian
Noninstitutional
Labor
Population
Force
Over 16 Years Old
Number Percentage
(Millions)
(Millions)
Of
Employment
(Millions)
Population
1947
1960
1970
1980
1990
2000
2007
Percentage change, 19472007
Annual rate
101.8
117.3
137.1
167.7
189.2
212.6
231.9
+ 127.8%
+ 1.4%
59.4
69.6
82.8
106.9
125.8
142.6
153.1
+ 157.7%
+1.6%
58.3
59.3
60.4
63.7
66.5
67.1
66.0
57.0
65.8
78.7
99.3
118.8
136.9
146.0
+ 156.1%
+ 1.6%
Source: Economic Report of the President, 2008, Table B-35.
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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.
16 of 39
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.
17 of 39

TABLE 17.4 Economic Growth from an Increase in CapitalMore Output,

Diminishing Returns to Added Capital, Higher Measured Labor
Productivity
Period
Quantity
Of Labor
L
(Hours)
Quantity
Of Capital
K
(Units)
Total
Output
Y
(Units)
Measured
Labor
Productivity
Y/L
100
100
300
3.0
100
110
310
3.1
100
120
319
3.2
100
130
327
3.3
18 of 39

TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 19602006

(Billions of 2000 Dollars)
Equipment
Structures
1960
645.7
2,273.3
1970
1,108.5
3,094.8
1980
1,910.0
4,047.7
1990
2,613.3
5,304.5
2000
4,090.5
6,301.6
2006
4,841.8
6,776.9
Percentage change, 19602006
+649.9%
+198.1%
+4.4%
+ 2.4%
Annual rate
Source: Survey of Current Business, September 2007, Table 15, p. 32 and authors estimates.
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Role of Institutions in Attracting Capital
foreign direct investment (FDI) Investment in

enterprises made in a country by residents outside
that country.
20 of 39

Increases in Human Capital
TABLE 17.6 Years of School Completed by People Over 25 Years Old, 19402006
1940
1950
1960
1970
1980
1990
2000
2006
Percentage With Less

Than 5 Years Of
School
Percentage With 4
Years Of High School
Or More
Percentage With 4
Years Of College
Or More
13.7
11.1
8.3
5.5
3.6
NA
NA
NA
24.5
34.3
41.1
52.3
66.5
77.6
84.1
85.5
4.6
6.2
7.7
10.7
16.2
21.3
25.6
28.0
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.
21 of 39

productivity of an input The amount of output
produced per unit of an input.
Technological Change
invention An advance in knowledge.

innovation The use of new knowledge to produce
a new product or to produce an existing product
more efficiently.
22 of 39
An increase in GDP can come about through:

a.
b.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d.
All of the above.
23 of 39
An increase in GDP can come about through:

a.
b.
c.
An increase in productivity (the amount of product produced by
each unit of capital or labor).
d. All of the above.
24 of 39

Economies of Scale
External economies of scale are cost savings that
result from increases in the size of industries.
Other Influences on Productivity

In addition to technological change, other
advances in knowledge, and economies of scale,
other forces may affect productivity.
25 of 39
Growth and Productivity in the United States
TABLE 17.7 Growth of Real GDP in the United States, 18712000

Period
Average Growth
Rate Per Year
Period
Average Growth
Rate 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
1990-2000
3.2
Sources: Historical Statistics of the United States: Colonial Times to 1970, Tables F47-70, F98-124; U.S. Department of
Commerce, Bureau of Economic Analysis.
26 of 39
The average growth rate of real GDP in the United States was highest
during the following period:
a.
1950-1960
b.
1960-1970
c.
1970-1980
d.
1980-1990
27 of 39
The average growth rate of real GDP in the United States was highest
during the following period:
a.
1950-1960
b. 1960-1970
c.
1970-1980
d.
1980-1990
28 of 39

Sources of Growth in the U.S. Economy
TABLE 17.8 Sources of Growth in the United States, 19291982
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
16
29
Education (human
capital)
19
20
15
18
Increases in productivity
47
51
55
Advances in knowledge
31
30
39
Other factorsa
16
21
16
Annual growth rate in

real national income
2.8
2.4
3.6
2.6
Economies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
Source: Edward Denison, Trends in American Economic Growth, 19291982 (Washington: Brookings Institution, 1985). Reprinted
with permission of The Brookings Institution.
a
29 of 39

Sources of Growth in the U.S. Economy
TABLE 17.9 Sources of U.S. Growth, 1995-2004
Percent Contribution 1995-2004
Increases in inputs
71.6
Labor
20.6
Capital
50.7
IT capital
22.8
Non-IT capital
27.9
Increases in productivity
28.4
Source: Information Technology and the American Growth Resurgence. Dale W. Jorgenson,
Mun S. Ho and Kevin J. Stiroh (Cambridge, MA: MIT Press, 2005). Data update provided by
the authors.
30 of 39
FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I2007 IV
31 of 39

Improving Productivity in
Health Care
Firms Health Clinics Cut Costs
Wall Street Journal
32 of 39
Economic Growth and Public Policy in the United States

Suggested Public Policies
Policies to Improve the Quality of Education
Policies to Increase the Saving Rate
Policies to Stimulate Investment
Policies to Increase Research and Development
Industrial Policy
Can We Really Measure

Productivity Changes?
One of the leading experts on
technology and productivity
estimates that we have reasonably
good measures of output and
productivity in only about 31
percent of the U.S. economy.
33 of 39
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.
34 of 39
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.
35 of 39
What is industrial policy?

a.
Industrial policy calls for the elimination of government intervention
in business activities.
b.
Industrial policy calls for government involvement in the allocation
of capital across manufacturing sectors.
c.
Industrial policy calls for the promotion of competition among
domestic and foreign business firms.
d.
Industrial policy government spending and taxation that favors all
business firms in the economy equally.
36 of 39
What is industrial policy?

a.
Industrial policy calls for the elimination of government intervention
in business activities.
b. Industrial policy calls for government involvement in the
allocation of capital across manufacturing sectors.
c.
Industrial policy calls for the promotion of competition among
domestic and foreign business firms.
d.
Industrial policy government spending and taxation that favors all
business firms in the economy equally.
37 of 39
Growth and the Environment and Issues of Sustainability

TABLE 17.10 Environmental Scores in the World Bank
Country Policy and Institutional Assessment
2005 Scores (min = 1, max = 6)
Albania
Angola
2.5
Bhutan
4.5
Cambodia
2.5
Cameroon
Gambia
Haiti
2.5
Madagascar
Mozambique
Papua New Guinea
1.5
Sierra Leone
2.5
Sudan
2.5
Tajikistan
2.5
Uganda
Vietnam
3.5
Zimbabwe
2.5
Source: World Bank, Policies and Institutions for Environmental Sustainability.
38 of 39
FIGURE 17.3 The

Relationship Between Per-Capita
GDP and Urban Air Pollution
One measure of air pollution is

smoke in cities. The relationship
between smoke concentration and
per-capita GDP is an inverted U:
As countries grow wealthier,
smoke increases and then
declines.
39 of 39

Sustainability of Resource Extraction Growth Strategies
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 skilledlabor base, public investment in infrastructure is
especially important.
40 of 39
REVIEW TERMS AND CONCEPTS
aggregate production function

catch-up
economic growth
foreign direct investment (FDI)
innovation
Invention
labor productivity
modern economic growth
productivity of an input
41 of 39

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PowerPoint Lectures for

CHAPTER 17 Long-Run Growth

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

CHAPTER 17 Long-Run Growth

Principles of Macroeconomics 9e by Case, Fair and Oster

PART IV FURTHER MACROECONOMICS ISSUES

Principles of Macroeconomics 9e by Case, Fair and Oster

PART IV FURTHER MACROECONOMICS ISSUES

CHAPTER 17 Long-Run Growth

The Sources of Economic Growth

2009 Pearson Education, Inc. Publishing as Prentice Hall

Growth and Productivity in the United

Principles of Macroeconomics 9e by Case, Fair and Oster

economic growth An increase in the total

CHAPTER 17 Long-Run Growth

modern economic growth The period of

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Growth Process: From Agriculture to Industry

CHAPTER 17 Long-Run Growth

FIGURE 17.1 Economic

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Growth Process: From Agriculture to Industry

CHAPTER 17 Long-Run Growth

Beginning in England around 1750, technical

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

CHAPTER 17 Long-Run Growth

Among the sources of increased productivity and growth in England

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

CHAPTER 17 Long-Run Growth

Among the sources of increased productivity and growth in England

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Growth Process: From Agriculture to Industry

CHAPTER 17 Long-Run Growth

Economic growth continues today, and while the

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Growth Process: From Agriculture to Industry

CHAPTER 17 Long-Run Growth

Republic of South Africa (2002-2007)

Source: Economic Report of the President, 2008.

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Growth Process: From Agriculture to Industry

CHAPTER 17 Long-Run Growth

catch-up The theory stating that the growth rates

2009 Pearson Education, Inc. Publishing as Prentice Hall

Principles of Macroeconomics 9e by Case, Fair and Oster

The Sources of Economic Growth

aggregate production function The

CHAPTER 17 Long-Run Growth

An increase in GDP can come about through

An increase in the labor supply.