Do Now.
• Define: GDP, Real GDP, and real GDP per
capita
• Define productivity
• In your opinion, are workers today more or
less productive than workers 100 years ago?
Why or why not?
• Why are some countries more productive than
others?
AP Macroeconomics
MR. Graham
Unit Seven
Economic Growth and Productivity
Module 37:
Long-run Economic Growth
3
Measuring Economic Growth
• India has a real GDP more than fifteen times
as large as that of Denmark
• India’s population is about 200 times greater
than that of Denmark
• India is relatively poor and Denmark is
relatively rich
Measuring Economic Growth
• Economic Growth: Increase in per capita real GDP
measured by its rate of change per year
• We focus on GDP because it measures total value
of an economy’s production of final goods and
services as well as the income earned in that
economy in a given year.
• We use real GDP because we want to separate
changes in the quantity of goods and services from
the effects of a rising price level.
• We focus on real GDP per capita because we want
to isolate the effect of changes in the population.
Measuring Economic Growth
 Despite dramatic economic growth in India and China over the
last 50 years, China has only just attained the standard of living
that the United States enjoyed in 1908, while India is still
poorer than the United States was in 1908.
Measuring Economic Growth
• A typical family in 1908 probably had purchasing power only
15% as large as purchasing power of a typical family in 2008.
• That’s around $8,000 in today’s dollars, representing a
standard of living that we would now consider severe poverty.
Measuring Economic Growth
• In fact, today more than 50% of the world’s people
live in countries with a lower standard of living than
the United States had a century ago.
Measuring Economic Growth
 Even though the U.S. is one of the world’s richest
countries, our rate of economic growth in recent
decades has been in the mid-range.
 U.S. per capita real GDP has remained higher than
other nations because we have been able to sustain
growth over many decades.
Measuring Economic Growth
• The importance of growth rates
– Do we need to worry about small differences in
the economic growth rate?
– A small difference in the rate of economic growth
does not matter very much for next year or the
year after, but it makes considerable difference for
the more distant future due to compounding.
Measuring Economic Growth
• GDP in 50 years at various growth rates
starting at $1 trillion
3%
4%
5%
$4.38
trillion
$7.11
trillion
$11.5
trillion
Growth Rates
 The Rule of 70
 the appropriate number of years required for per
capital real GDP to double.
• Example: At an annual growth rate of 10%, per capita
real GDP should double in about:
Sources of Long-Run Growth
• Sustained growth in real GDP per capita occurs
only when the amount of output produced by
the average worker increases steadily.
• The term labor productivity, or productivity for
short, is used to refer to output per worker.
• For the economy as a whole, productivity—output
per worker—is simply real GDP divided by the
number of people working.
Explaining Growth in Productivity
• There are three main reasons why the average
U.S. worker today produces far more than his
or her counterpart a century ago:
1. The modern worker has far more physical capital,
such as tools and office space, to work with.
2. The modern worker is much better educated and
so possesses much more human capital.
3. Modern firms have the advantage of a century’s
accumulation of technical advancements
reflecting a great deal of technological progress
Do Now.
• Why are works more productive today than
100 years ago?
• What are some things that made countries
wealthy 100 years ago? What makes
countries wealthy today? Are these things the
same?
• In your opinion, which generally leads to
greater increases in real GDP: technology or
investment spending?
Module 38:
Productivity and Growth
16
Accounting for Growth:
The Aggregate Production Function
• Productivity is higher, other things equal, when
workers are equipped with more physical capital,
more human capital, better technology, or any
combination of the three.
• To put numbers to these effects, economists make
use of estimates of aggregate production function
– Shows how productivity (output per worker)
depends on the quantities of physical capital per
worker and human capital per worker as well as the
state of technology.
Accounting for Growth:
The Aggregate Production Function
• The function reflects a positive relationship
(i.e. upward sloping curve) between the
determinants of productivity and output.
Diminishing Returns to Physical Capital
• In analyzing historical economic growth,
economists have discovered the relationship
between physical capital and productivity
exhibits diminishing returns, ceteris paribus.
Diminishing Returns to Physical Capital
• When the amount of human capital per worker and the state of
technology are held fixed, each successive increase in the amount of
physical capital per worker leads to a smaller increase in productivity.
• Ex.—farming with a tractor as opposed to without, farming with a more
expensive tractor as opposed to a cheaper one
Accounting for Growth:
The Aggregate Production Function
• In practice, all factors (physical capital, human capital,
and technology advances) contributing to higher
productivity rise during course of economic growth.
• To disentangle the effects of these factors, economists
use the aggregate production function to estimate the
contribution of each factor to economic growth.
Accounting for Growth:
The Aggregate Production Function
• How do we disentangle the effects of each factor?
• Suppose the following are true:
• The amount of physical capital per worker grows 3% a year.
• According to estimates of the aggregate production function,
each 1% rise in physical capital per worker raises output per
worker by one-third of 1%, or .33%.
• In this case, we estimate that growing physical capital per
worker is responsible for 1 percentage point (3% x .33) of
productivity growth per year.
• A similar but more complex procedure is used to
estimate the effects of growing human capital…
Accounting for Growth:
The Aggregate Production Function
• Can we estimate the effects of technological progress?
• Yes—by estimating what is left over after the effects of
physical/human capital have been taken into account.
Accounting for Growth:
The Aggregate Production Function
 Without any change in
technology, output rises
from $30,000 to $60,000
(1% per year according to
the Rule of 70).
 In reality, output rose from
$30,000 to $120,000
(2% per year).
• In this case, 50% of the annual 2% increase in
productivity is due to higher total factor
productivity (i.e. technological progress).
Accounting for Growth:
The Aggregate Production Function
 According to the Bureau of
Labor Statistics, over the
period from 1948 to 2008
American labor productivity
rose 2.6% per year.
 46% of that rise is explained
by increases in physical and
human capital per worker;
the rest is explained by
technological progress.
Accounting for Growth:
The Aggregate Production Function
• An example of an aggregate production function was
created by the Brookings Institution from a
comparative study of Chinese and Indian growth:
GDP per worker = T x (Physical capital per worker)0.4 x (Human capital per worker)0.6
• Using this function, they tried to explain why China
grew faster than India between 1978 and 2004.
– About half the difference, they found, was due to China’s
higher levels of investment spending..
– Other half was due to faster Chinese technological progress.
– (T represents an estimate level of technology)
What About Natural Resources?
• Other things equal, countries that are abundant in
valuable natural resources, such as highly fertile land
or rich mineral deposits, have higher real GDP per
capita than less fortunate countries (i.e. Middle East).
– Historically, natural resources played a much more
prominent role in determining productivity.
– In the modern world, natural resources are a
much less important determinant of productivity
than human or physical capital for the great
majority of countries
Understanding the Rise of China:
Martin Jacques
• http://www.ted.com/talks/martin_jacques_un
derstanding_the_rise_of_china.html
Do Now.
• http://www.criticalcommons.org/Members/fs
ustavros/clips/louis-ck-technology
• http://www.criticalcommons.org/Members/A
drianFohr/clips/disappearing-gangs-of-newyork
Module 39:
Growth Policy:
Why Economic Growth Rates Differ
30
Why Growth Rates Differ
• In 1820, according to estimates by the economic
historian Angus Maddison, Mexico had somewhat
higher real GDP per capita than Japan.
• Today, Japan has higher real GDP per capita than
most European nations and Mexico is a poor
country, though by no means among the poorest.
• The difference? Over the long run, real GDP per
capita grew at 1.9% per year in Japan but at only
1.2% per year in Mexico.
Capital, Technology, and Growth Differences
• As one might expect, economies with rapid
growth tend to be economies that add physical
capital, increase their human capital, or
experience rapid technological progress.
• Striking economic success stories, like Japan in
the 1950s and 1960s or China today, tend to be
countries that do all three: that rapidly add to
their physical capital, upgrade their educational
level, and make fast technological progress
Encouraging to Economic Growth
1. Adding to Physical Capital
– Occurs through high rates of investment spending.
– Must be paid for either out of savings from domestic
households or by an inflow of foreign capital (i.e.
savings from foreign households).
• The Role of Government
– Government subsidies to infrastructure (direct)
– Maintaining a well-functioning financial system
– Political stability and good governance
Encouraging to Economic Growth
2. Adding to Human Capital
• The Role of Government
– Government subsidies to education
Encouraging to Economic Growth
3. Technological Progress
– Scientific advances gained through private
spending on R&D make new technologies possible.
– Scientific knowledge must be translated into useful
products/processes and applied.
• The Role of Government
– Government subsidies to R&D
– Protection of property rights
Success, Disappointment, and Failure
Success, Disappointment, and Failure
• East Asia’s Miracle
– Very high savings rates have increased the amount of
physical capital per worker
– Very good basic education has improved human capital
– Substantial technological progress
• Rapid growth largely due to the relatively low “starting
point”.
• Convergence hypothesis—international differences in
real GDP tend to narrow over time
• Diminishing returns of physical and human capital;
• Replication of production methods (i.e. technology).
Success, Disappointment, and Failure
• Latin America’s Disappointment
– Abundant natural resources, but…
– Relatively low rate of savings and investment
spending
– Education has been underemphasized
• Governments have tried to “open” their
economies, but result has not yet been
productive.
Success, Disappointment, and Failure
• Africa’s Troubles
• Real GDP per capita in sub-Saharan Africa (about
780 million people) fell 13% from 1980-1994.
– Political instability since 1975 has killed millions of
people and made productive investment spending
impossible.
– Property rights are lacking
– Unfavorable geographic conditions (hot, landlocked,
poor soil, tropical diseases).
• Opening of economy has improved their situation.
Is World Growth Sustainable?
• Natural Resources and Growth, Revisited
– Limited supplies of nonrenewable resources (i.e. oil
and natural gas) may be a limitation of growth.
1. How large are the supplies of key natural
resources?
2. How effective will technology be at finding
alternatives to natural resources?
3. Can long-run economic growth continue in the
face of resource scarcity?
Is World Growth Sustainable?
• Economists maintain that resource scarcity leads to higher
resource prices, which, in turn, provides strong incentives
to conserve the scarce resource and to find alternatives.
Is World Growth Sustainable?
• The much greater problem associated with
growth are environmental issues.
Is World Growth Sustainable?
• Sustainable growth, then, must include:
– Policy to encourage productivity increases;
– Policy to seek and employ alternatives to scarce
resources;
– Policy to protect the environment.
“Costs” of Economic Growth
TED
• http://www.ted.com/talks/niall_ferguson_the
_6_killer_apps_of_prosperity
Do Now: Watch these videos
• http://www.criticalcommon
s.org/Members/MCIMR/clip
s/clip-from-spaceballs
• http://www.criticalcommon
s.org/Members/JLipshin/cli
ps/THE_MATRIX_glitches2.
mp4
Questions
• How does technology
impact economic growth?
• Will technology ever
become a negative? Why or
why not?
• What three technologies
are contributing most to
economic growth in your
opinion?
Module 40:
Economic Growth in Macroeconomic Models
47
Long-Run Economic Growth
• As we have seen throughout this section, long-run
economic growth depends almost entirely on
rising productivity. Good macroeconomic policy
strives to foster increases in productivity, which in
turn leads to long-run economic growth.
• In this module, we will learn how to evaluate the
effects of long-run growth policies using the
production possibilities curve and the aggregate
demand and supply model.
Long-Run Economic Growth and
the Production Possibilities Curve
Long-Run Economic Growth and
the Production Possibilities Curve
• Point A—economy cannot survive without consumer
goods
– Points towards A create more production
possibilities
• Point D—services will be provided for citizens but the
value of its physical capital will depreciate over time
if Kyland continues to produce at this point over
time. (curve would eventually shift inward over
time)
• Points B and C are acceptable, depending on values
of the society
Long-Run Economic Growth and
the AD-AS Model
Long-Run Economic Growth and
the AD-AS Model
• It is vertical because a long run change in
aggregate price level has no effect on quantity
supplied
• Real GDP is almost always above or below
potential output (LRAS)
• Economic growth over time can be shown by a
rightward shift in the LRAS curve.
Modeling Long-Run Economic Growth
• What can cause the PPC or LRAS to shift right?
1. An increase in the amount of resources
– Land (natural resources) and Labor (population)
2. An increase in the productivity of resources
– Productivity is higher, other things equal, when
workers are equipped with more physical capital,
more human capital, better technology, or any
combination of the three.
Long-Run Economic Growth and
the AD/AS Model
Mini Poster Country Comic Strip
• Create a comic strip illustrating economic
growth (or lack of) in your country
• Include the following:
– At least 3 scenes
– Your countries economic history, a story of success
or failure
– Creativity and insightfulness