Long-Run Growth: The Growth Process from Agriculture to Industry

2. 18 Long-Run Growth Chapter Outline The Growth Process: From Agriculture to IndustryThe Sources of Economic GrowthAn Increase in Labor SupplyIncreases in Physical CapitalIncreases in Human CapitalIncreases in ProductivityGrowth and Productivity in the United StatesSources of Growth in the U.S. Economy: 1929–1982Labor Productivity: 1952 I–2005 IIEconomic Growth and Public PolicySuggested Public PoliciesGrowth Policy: A Long-Run PropositionThe Pros and Cons of GrowthThe Progrowth ArgumentThe Antigrowth ArgumentSummary: No Right Answer

3. LONG-RUN GROWTH economic growth An increase in the total output of an economy. Defined by some economists as an increase of real GDP per capita. modern economic growth The period of rapid and sustained increase in real output per capita that began in the Western world with the Industrial Revolution.

4. THE GROWTH PROCESS: FROM AGRICULTURE TO INDUSTRY FIGURE 18.1 Economic Growth Shifts Society’s Production Possibility Frontier Up and to the Right

5. 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.

6. Among the sources of increased productivity and growth in England around 1750 was: a. Technical change and capital accumulation. b. New and more efficient methods of farming. c. New inventions and new machinery. d. All of the above.

7. Among the sources of increased productivity and growth in England around 1750 was: a. Technical change and capital accumulation. b. New and more efficient methods of farming. c. New inventions and new machinery. d. All of the above.

8. 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.

9. 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)

10. 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.

11. THE SOURCES OF ECONOMIC GROWTH As long as the economy and the capital stock are expanding rapidly enough, new entrants into the labor force do not displace other workers.

12. In order for economic growth to increase the standard of living: a. The rate of output growth must exceed the rate of population increase. b. Income must be distributed equally. c. The government must practice industrial policy. d. Citizens must experience improvements in the quality of life.

13. In order for economic growth to increase the standard of living: a. The rate of output growth must exceed the rate of population increase. b. Income must be distributed equally. c. The government must practice industrial policy. d. Citizens must experience improvements in the quality of life.

14. THE SOURCES OF ECONOMIC GROWTH INCREASES IN PHYSICAL CAPITAL

15. THE SOURCES OF ECONOMIC GROWTH

16. THE SOURCES OF ECONOMIC GROWTH INCREASES IN HUMAN CAPITAL

17. 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.

18. An increase in GDP can come about through: a. An increase in the labor supply. b. An increase in physical or human capital. c. An increase in productivity (the amount of product produced by each unit of capital or labor). d. All of the above.

19. An increase in GDP can come about through: a. An increase in the labor supply. b. An increase in physical or human capital. c. An increase in productivity (the amount of product produced by each unit of capital or labor). d. All of the above.

20. THE SOURCES OF ECONOMIC GROWTH Other Advances in Knowledge In addition to managerial knowledge, improved personnel management techniques, accounting procedures, data management, and the like can also make production more efficient, reduce costs, and increase measured productivity. Economies of Scale External economies of scale are cost savings that result from increases in the size of industries. Other Influences on Productivity

21. GROWTH AND PRODUCTIVITYIN THE UNITED STATES

22. The average growth rate of real GDP in the United States was highest during the following period: a. 1950-1960 b. 1960-1970 c. 1970-1980 d. 1980-1990

23. The average growth rate of real GDP in the United States was highest during the following period: a. 1950-1960 b. 1960-1970 c. 1970-1980 d. 1980-1990

24. GROWTH AND PRODUCTIVITYIN THE UNITED STATES

25. GROWTH AND PRODUCTIVITYIN THE UNITED STATES SOURCES OF GROWTH IN THE U.S. ECONOMY: 1929–1982

26. GROWTH AND PRODUCTIVITYIN THE UNITED STATES

27. GROWTH AND PRODUCTIVITYIN THE UNITED STATES LABOR PRODUCTIVITY: 1952 I–2003 II FIGURE 18.2 Output per Worker Hour (Productivity), 1952 I–2005 II

28. ECONOMIC GROWTH AND PUBLIC POLICY 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 Reduced Regulations Industrial Policy industrial policy Government involvement in the allocation of capital across manufacturing sectors.

29. The accumulation of capital in an economy is ultimately constrained by: a. The rate of saving. b. The rate of spending relative to income growth. c. Depreciation. d. Government spending and taxation.

30. The accumulation of capital in an economy is ultimately constrained by: a. The rate of saving. b. The rate of spending relative to income growth. c. Depreciation. d. Government spending and taxation.

31. ECONOMIC GROWTH AND PUBLIC POLICY GROWTH POLICY: A LONG-RUN PROPOSITION The fact that progrowth policies can be costly in the short run and do not produce measurable results for a long time often pushes them far down on politicians’ lists of priorities.

32. What is industrial policy? a. Industrial policy calls for the elimination of government intervention in business activities. b. Industrial policy calls for government involvement in the allocation of capital across manufacturing sectors. c. Industrial policy calls for the promotion of competition among domestic and foreign business firms. d. Industrial policy government spending and taxation that favors all business firms in the economy equally.

33. What is industrial policy? a. Industrial policy calls for the elimination of government intervention in business activities. b. Industrial policy calls for government involvement in the allocation of capital across manufacturing sectors. c. Industrial policy calls for the promotion of competition among domestic and foreign business firms. d. Industrial policy government spending and taxation that favors all business firms in the economy equally.

34. THE PROS AND CONS OF GROWTH THE PROGROWTH ARGUMENT • Advocates of growth believe that: • Growth is progress. • Capital accumulation and new technology improve the quality of life. • Growth saves the most valuable commodity—time. • - Growth improves the quality of things that yield satisfaction directly. • - Growth produces jobs and higher incomes. With higher incomes we can better afford the sacrifices needed to help the poor. • - When population growth is not accompanied by growth in output, unemployment and poverty increase.

35. THE PROS AND CONS OF GROWTH THE ANTIGROWTH ARGUMENT Those who argue against economic growth generally make the following four major points: Growth Has Negative Effects on the Quality of Life Growth Encourages the Creation of Artificial Needs consumer sovereignty The notion that people are free to choose, and that things that people do not want will not sell. “The consumer rules.”

36. THE PROS AND CONS OF GROWTH Growth Means the Rapid Depletion of a Finite Quantity of Resources Growth Requires an Unfair Income Distribution and Propagates It

37. SUMMARY: NO RIGHT ANSWER Society must make some hard choices, and there are many trade-offs. As long as these trade-offs exist, people will disagree. The debate in contemporary politics is largely about the costs and benefits of shifting more effort toward the goal of economic growth and away from environmental and social welfare goals.

38. REVIEW TERMS AND CONCEPTS • aggregate production function • consumer sovereignty • economic growth • industrial policy • innovation • invention • labor productivity • modern economic growth • productivity of an input