This document discusses factors that influence long-run economic growth, including increases in labor supply, physical and human capital, productivity, and technology. It provides data on sources of growth in the US economy from 1929-1982 and 1995-2004, showing contributions from inputs like labor, capital, and productivity increases. The document also outlines public policy suggestions to improve education, saving, investment, and research to stimulate long-term growth and discusses challenges in accurately measuring productivity changes.

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PowerPoint Lectures for
Principles of Economics,
9e
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
; ;

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3. © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
PART VI FURTHER MACROECONOMICS
ISSUES
32
Fernando & Yvonn Quijano
Prepared by:
Long-Run Growth

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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:
1929–1982
Labor Productivity: 1952 I–2007 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
CHAPTER OUTLINE
32
PART VI FURTHER MACROECONOMICS
ISSUES
Long-Run Growth

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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.

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The Growth Process: From Agriculture to Industry
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 expands
society’s production possibilities,
shifting the ppf up and to the right.
 FIGURE 32.1 Economic
Growth Shifts Society’s
Production Possibility Frontier 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.
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.
From Agriculture to Industry: The Industrial Revolution

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The Growth Process: From Agriculture to Industry
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.
Growth in Modern Society

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The Growth Process: From Agriculture to Industry
Growth Patterns and the Possibility of Catch-Up
TABLE 32.1 Growth of Real GDP: 1999-2007
Country
Average Growth Rate
Per Year, 1999-2007
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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The Growth Process: From Agriculture to Industry
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.
Growth Patterns and the Possibility of Catch-Up

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The Sources of Economic Growth
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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The Sources of Economic Growth
An Increase in Labor Supply
labor productivity Output per worker hour; the
amount of output produced by an average worker
in 1 hour.
TABLE 32.2 Economic Growth from an Increase in Labor—More 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
1 100 100 300 3.0
2 110 100 320 2.9
3 120 100 339 2.8
4 130 100 357 2.7

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The Sources of Economic Growth
An Increase in Labor Supply
TABLE 32.3 Employment, Labor Force, and Population Growth, 1947–2007
Civilian
Noninstitutional
Population
Over 16 Years Old
(Millions)
Civilian
Labor
Force
Employment
(Millions)
Number
(Millions)
Percentage
Of
Population
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
2000 212.6 142.6 67.1 136.9
2007 231.9 153.1 66.0 146.0
Percentage change, 1947–2007 + 127.8% + 157.7% + 156.1%
Annual rate + 1.4% +1.6% + 1.6%
Source: Economic Report of the President, 2008, Table B-35.

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The Sources of Economic Growth
Increases in Physical Capital
TABLE 32.4 Economic Growth from an Increase in Capital—More 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
1 100 100 300 3.0
2 100 110 310 3.1
3 100 120 319 3.2
4 100 130 327 3.3

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The Sources of Economic Growth
Increases in Physical Capital
TABLE 32.5 Fixed Private Nonresidential Net Capital Stock, 1960–2006
(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, 1960–2006 +649.9% +198.1%
Annual rate +4.4% + 2.4%
Source: Survey of Current Business, September 2007, Table 15, p. 32 and author’s estimates.

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The Sources of Economic Growth
Increases in Physical Capital
Role of Institutions in Attracting Capital
foreign direct investment (FDI) Investment in
enterprises made in a country by residents outside
that country.

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The Sources of Economic Growth
Increases in Human Capital
TABLE 32.6 Years of School Completed by People Over 25 Years Old, 1940–2006
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
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
2000 NA 84.1 25.6
2006 NA 85.5 28.0
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2008, Table 217.

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The Sources of Economic Growth
Increases in Productivity
Technological Change
productivity of an input The amount of output
produced per unit of an input.
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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The Sources of Economic Growth
Increases in Productivity
Economies of Scale
External economies of scale are cost savings that
result from increases in the size of industries.
In addition to technological change, other
advances in knowledge, and economies of scale,
other forces may affect productivity.
Other Influences on Productivity

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Growth and Productivity in the United States
TABLE 32.7 Growth of Real GDP in the United States, 1871–2000
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.

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Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE 32.8 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 in 2.8 2.4 3.6 2.6
real national income
a
Economies of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
Source: Edward Denison, Trends in American Economic Growth, 1929–1982 (Washington: Brookings Institution, 1985). Reprinted
with permission of The Brookings Institution.

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Growth and Productivity in the United States
Sources of Growth in the U.S. Economy
TABLE 32.9 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.

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Growth and Productivity in the United States
Labor Productivity: 1952 I–2007 IV
 FIGURE 32.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

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Growth and Productivity in the United States
Labor Productivity: 1952 I–2007 IV
Improving Productivity in
Health Care
Firms’ Health Clinics Cut Costs
Wall Street Journal

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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.

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Growth and the Environment and Issues of Sustainability
TABLE 32.10 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
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
Source: World Bank, “Policies and Institutions for Environmental Sustainability.”

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Growth and the Environment and Issues of Sustainability
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.
 FIGURE 32.3 The
Relationship Between Per-Capita
GDP and Urban Air Pollution

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Growth and the Environment and Issues of Sustainability
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 skilled-
labor base, public investment in infrastructure is
especially important.

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aggregate production function
catch-up
economic growth
foreign direct investment (FDI)
innovation
Invention
labor productivity
modern economic growth
productivity of an input
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