PRINCIPLES OF

MACROECONOMICS
TENTH EDITION
PART IV Further Macroeconomics Issues

CASE FAIR OSTER

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 PART IV Further Macroeconomics Issues

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 Long-Run Growth
17
CHAPTER OUTLINE
The Growth Process: From Agriculture to Industry
Sources of Economic Growth
Increase in Labor Supply
Increase in Physical Capital
Increase in the Quality of the Labor Supply (Human Capital)
Increase in the Quality of Capital (Embodied Technical
Change)
Disembodied Technical Change
More on Technical Change
U.S. Labor Productivity: 1952 I2010 I
PART IV Further Macroeconomics Issues

Growth and the Environment and Issues of

Sustainability

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 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.
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labor productivity growth The growth

rate of output per worker.

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 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.
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 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
PART IV Further Macroeconomics Issues

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

more highly skilled workforce (human capital); and increasingly from innovation,
technical change, and newly developed products and services.

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 The Growth Process: From Agriculture to Industry
TABLE 17.1 Growth of Real GDP: 19912007
Average Growth Rates per Year,
Country percentage points, 1991-2007
United States 3.0
Japan 1.3
Germany 1.7
France 1.9
United Kingdom 2.5
China 10.4
India 6.3
Africa 3.8

catch-up The theory stating that the growth rates of less

PART IV Further Macroeconomics Issues

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.
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 Sources of Economic Growth

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.

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.
PART IV Further Macroeconomics Issues

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.

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 Sources of Economic Growth

Increase in Labor Supply

TABLE 17.2 Economic Growth from an Increase in LaborMore Output but

Diminishing Returns and Lower Labor Productivity

Quantity Quantity Total Labor

of Labor of Capital Output Productivity
Period L K Y Y/L

1 100 100 300 3.0

2 110 100 320 2.9
3 120 100 339 2.8
PART IV Further Macroeconomics Issues

4 130 100 357 2.7

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 Sources of Economic Growth

Increase in Labor Supply

TABLE 17.3 Employment, Labor Force, and Population Growth, 19602008

Civilian Civilian
Noninstitutional Labor
Population Force
16 and Over Number Percentage Employment
(Millions) (Millions) of Population (Millions)

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
PART IV Further Macroeconomics Issues

1990 189.2 125.8 66.5 118.8

2000 212.6 142.6 67.1 136.9
2008 233.8 154.3 66.0 145.4
Percentage change, 19602008 +99.3% +126.7% +121.0%
Annual rate +1.4% +1.6% +1.6%

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 Sources of Economic Growth

Increase in Physical Capital

TABLE 17.4 Economic Growth from an Increase in CapitalMore Output, Diminishing Returns
to Added Capital, Higher Labor Productivity

Quantity Quantity Total Labor Output

of Labor of Capital Output Productivity per Capital
Period L K Y Y/L Y/K

1 100 100 300 3.0 3.0

2 100 110 310 3.1 2.8
PART IV Further Macroeconomics Issues

3 100 120 319 3.2 2.7

4 100 130 327 3.3 2.5

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 Sources of Economic Growth

Increase in Physical Capital

TABLE 17.5 Fixed Private Nonresidential Net Capital Stock, 19602008

(Billions of 2005 Dollars)

Equipment Structures

1960 666.8 2,860.1

1970 1,146.8 3,951.8
1980 1,919.6 5,216.8
1990 2,603.8 6,908.4
PART IV Further Macroeconomics Issues

2000 4,204.1 8,162.1

2008 5,400.0 9,266.5
Percentage change, 19602008 +709.8% +224.0%
Annual rate +4.4% + 2.4%

foreign direct investment (FDI) Investment in enterprises

made in a country by residents outside that country.
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 Sources of Economic Growth

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

TABLE 17.6 Years of School Completed by People Over 25 Years Old, 19402008

Percentage with Less Percentage with 4 Percentage with 4

than 5 Years of Years of High School Years 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
PART IV Further Macroeconomics Issues

1980 3.6 66.5 16.2

1990 NA 77.6 21.3
2000 NA 84.1 25.6
2008 NA 86.6 29.4

NA = not available.

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 EC ON OMIC S IN PRACTICE

Education and Skills in the United Kingdom

In discussions of using
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
PART IV Further Macroeconomics Issues

also concerned about the

skill level of their labor
force as they contemplate their productivity and growth rates.

U.K. Businesses Press for Focus on Skills

The Wall Street Journal

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 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.
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More on Technical 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.

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 Sources of Economic Growth

U.S. Labor Productivity: 1952 I2010 I

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FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I2010 I

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 Growth and the Environment and Issues of Sustainability

TABLE 17.7 Environmental Scores in the

World Bank Country Policy and
Institutional Assessment 2005
Scores (min = 1, max = 6)
Albania 3
Angola 2.5
Bhutan 4.5
Cambodia 2.5
Cameroon 4
Gambia 3
Haiti 2.5
Madagascar 4
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Mozambique 3
Papua New Guinea 1.5
Sierra Leone 2.5
Sudan 2.5
Tajikistan 2.5
Uganda 4
Vietnam 3.5
Zimbabwe 2.5

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 Growth and the Environment and Issues of Sustainability

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:
PART IV Further Macroeconomics Issues

As countries
grow wealthier,
smoke increases
and then
declines.

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 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.
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 REVIEW TERMS AND CONCEPTS

aggregate production function

catch-up

disembodied technical change

embodied technical change

foreign direct investment (FDI)

innovation

invention
PART IV Further Macroeconomics Issues

labor productivity growth

output growth

per-capita output growth

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