Productivity and Growth

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Macro
ECON
McEachern 2008-2009
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CHAPTER
Productivity and Growth
Designed by Amy McGuire, B-books, Ltd.
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Theory of Productivity and Growth

• Increased standard of living
• Increase in amount of resources
• Increase in quality of resources
• Better technology
• Better rules of the game

LO1
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Growth and PPF

• PPF, production possibilities frontier
• Economys production
• Efficient use of resources
• Assumptions
• Fixed
• Quantity of resources
• Technology
• Rules of the game
• Two categories of products
• Consumer goods
• Capital goods

LO1
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Growth and PPF

• PPF
• Inside Inefficient
• Outside Unattainable
• On the PPF Efficient
• Bowed out
• Some resources are specialized
• Economic growth
• Outward shift of PPF

LO1
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Growth and PPF

• Economic growth
• Greater availability of resources
• Better quality resources
• Technological change
• Better rules of the game

LO1
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Exhibit 1(a) and 1(b)
LO1
Economic Growth Shown by Shifts Outward in the
Production Possibilities Frontier
(a) Lower growth
(b) Higher growth
An economy that produces more capital goods will
grow more, as reflected by a shift outward of the
PPF. More capital goods and fewer consumer goods
are produced in panel (b) than in panel (a) so
the PPF shifts out more in panel (b).
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What is Productivity?

• Production
• Process
• Transform resources
• Into goods and services
• Productivity
• Efficient use of resources
• Ratio Total output to specific input
• Labor productivity
• Output per unit of labor

LO1
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Labor Productivity

• Labor
• 70 of production costs
• Easily measured
• Available statistics
• Labor productivity
• Increases with
• Human and physical capital per worker

LO1
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Per-Worker Production Function

• Relationship
• Capital per worker
• Output per worker
• Per-worker production function
• Upward sloping
• Diminishing slope
• Diminishing marginal returns from capital
• Increased productivity
• More capital per worker
• Movement along PF

LO1
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Exhibit 2
LO1
Per-Worker Production Function
The per-worker production function, PF, shows a
direct relationship between the amount of capital
per worker, k, and the output per worker, y.
The bowed shape of PF reflects the law of
diminishing marginal returns from capital As
more capital is added to a given number of
workers, output per worker increases but at a
diminishing rate and eventually could turn
negative.
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Technological Change

• Technology
• Better quality of capital
• Increased productivity
• Upward rotation of PF
• Higher standard of living

LO1
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Exhibit 3
LO1
Impact of a Technological Breakthrough on the
Per-Worker Production Function
A technological breakthrough increases output per
worker at each level of capital per
worker. Better technology makes workers more
productive. This is shown by an upward rotation
of the per-worker production function from PF to
PF. An improvement in rules of the game would
have a similar effect.
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Rules of the Game

• Formal, informal institutions
• Laws, customs, manners, conventions
• Stable political climate
• Benefit productivity
• Upward rotation of PF

LO1
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Productivity and Growth in Practice

• Industrial market economies
• Higher standard of living
• 15 of world population
• Produce 54 of worlds output
• Developing countries
• Poor countries
• Low standard of living
• Less human and physical capital
• Low labor productivity

LO2
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Education and Economic Development

• Education
• Human capital
• Higher productivity
• Industrial market economies
• Higher education levels
• Developing countries
• Lower education levels

LO2
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Exhibit 4
LO2
Average Years of Education of Working-Age
Populations in 1998 and 2003
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U.S. Labor Productivity

• Annual productivity growth
• 2.1 per year, since 1870 (by 1,680)
• Over long periods
• Small differences in productivity
• Huge differences in standard of living
• 1948-1973 Golden days 2.9 per year
• 1974-1982 Slowdown to 1
• Oil pieces
• Legislation
• 1983 rebound
• Information revolution

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Exhibit 5
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Long-Term Trend in U.S. Labor Productivity
Growth Annual Average by Decade
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Exhibit 6
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U.S. Labor Productivity Growth Slowed During
1974-1982 and Then Rebounded
The growth in labor productivity declined from
2.9 per year between 1948 and 1973 to only 1.0
between 1974 and 1982. A jump in the price of oil
contributed to three recessions during that
stretch, and new environmental and workplace
regulations, though necessary and beneficial,
slowed down productivity growth temporarily. The
information revolution powered by the computer
chip and the Internet has boosted productivity in
recent years.
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LO2
Computers, the Internet, and Productivity Growth

• 1971 400 computations/second
• 1981 330,000 computations/second
• Today 3 billion computations/second
• Productivity boost
• Efficiency gains
• production
• Computers
• Semiconductors
• Greater computer
• use by industry

Case Study
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Output per Capita

• Standard of living
• Output per capita
• Real GDP per capita
• US
• General upward trend
• During recessions
• Decrease in productivity

LO2
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Exhibit 7
LO2
U.S. Real GDP per Capita Has Nearly Tripled Since
1959
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International Comparisons

• US, level of output per capita
• The highest 44,000 per capita, 2006
• 24 more than Canada
• US, growth in output per capita
• The second 2.2 per year
• After United Kingdom

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Exhibit 8
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U.S. GDP per Capita Is Highest of Major Economies
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Exhibit 9
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U.S. Real GDP per Capita Outgrew That of Most
Other Major Economies Since 1982
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Technological Change and Unemployment
LO3

• Technological change
• Job dislocations
• Displaced workers
• More affordable products
• Higher demand
• Increased employment and production
• Does technological change lead to unemployment?
• No statistical evidence

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Research and Development
LO3

• Basic research
• General search for knowledge
• First step for technological advancement
• Yields a higher return
• to society
• Applied research
• Answer particular questions
• Develop specific products

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Exhibit 10
LO3
RD Spending as a Percentage of GDP for Major
Economies during the 1980s, 1990s, and 2005
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Industrial Policy
LO3

• Industrial policy
• Government
• Use taxes, subsidies, regulations, coordination
• Nurture technologies
• Protect domestic industries
• Concerns
• Governments efficiency
• Giveaway programs

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Do Economies Converge?
LO3

• Convergence theory
• Developing countries
• Can grow faster than
• advanced ones
• Should eventually
• close the gap
• Explanations
• Adopt existing technologies
• Invest in human resources

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Do Economies Converge?
LO3

• Evidence
• Few poor countries are closing the gap
• Others
• Slow growth
• Lower relative standard of living
• Trapped
• Explanations
• High birthrates Difference in human capital
• Unstable economic environment
• No institutions Bad infrastructures Civil war

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Income and Happiness
LO3

• Happiness index
• Living conditions Income Environment
• Social welfare Employment
• High income happy
• Low income not happy
• Within a country
• Richer generation
• Just as happy as previous ones
• Luxuries then necessities now
• Income relative to others income

Case Study