The Growth Process: From Agriculture to Industry The Sources of Economic Growth

1. Long-Run Growth 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: 1929–1982Labor 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 Lecture 12

2. 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.

3. The Growth Process: From Agriculture to Industry  FIGURE 17.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and to the Right 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.

4. The Growth Process: From Agriculture to Industry 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.

5. The Growth Process: From Agriculture to Industry 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.

6. The Growth Process: From Agriculture to Industry Growth Patterns and the Possibility of Catch-Up

7. The Growth Process: From Agriculture to Industry 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.

8. 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 • An increase in the labor supply. • An increase in physical or human capital. • An increase in productivity (the amount of product produced by each unit of capital or labor).

9. 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.

10. The Sources of Economic Growth An Increase in Labor Supply

11. The Sources of Economic Growth Increases in Physical Capital

12. The Sources of Economic Growth Increases in Physical Capital

13. 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.

14. The Sources of Economic Growth Increases in Human Capital

15. The Sources of Economic Growth Increases in Productivity 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.

16. 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. Other Influences on Productivity In addition to technological change, other advances in knowledge, and economies of scale, other forces may affect productivity.

17. Growth and Productivity in the United States

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

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

20. Growth and Productivity in the United States Labor Productivity: 1952 I–2007 IV  FIGURE 17.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

21. Growth and the Environment and Issues of Sustainability

22. 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: As countries grow wealthier, smoke increases and then declines.

23. 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.

24. 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