ECON Macroeconomics 4 4th Edition McEachern Solutions Manual Download

ECON MACROECONOMICS 4 4TH EDITION
MCEACHERN
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CHAPTER 8
PRODUCTIVITY AND GROWTH
In this chapter, you will find:

Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
This chapter introduces productivity and growth as keys to economic prosperity, using the per-worker
production function as a framework. The productivity across nations is examined and the U.S. growth
record, particularly since World War II, is considered in detail. Given the importance of productivity
growth in determining a nation’s standard of living, this is an especially interesting and relevant chapter.
LEARNING OUTCOMES
8-1 Describe how we measure labor productivity, and explain why is it important for a nation's
standard of living.
If the population is continually increasing, an economy must produce more goods and services
simply to maintain its standard of living, as measured by output per capita. If output grows faster
than the population, the standard of living rises. The per-worker production function shows the
relationship between the amount of capital per worker in the economy and the output per worker. As
capital per worker increases, so does output per worker but at a decreasing rate. Technological
change and improvements in the rules of the game shift the per-worker production function upward.
8-2 Summarize the history of U.S. labor productivity changes since World War II, and explain why
these changes matter.
Since 1870, U.S. labor productivity growth has averaged 2.1 percent per year. The quality of labor
and capital is much more important than the quantity of these resources. Between World War II and
1973, labor productivity was strong, averaging 2.8 percent. Labor productivity growth slowed
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8 Productivity and Growth 110
between 1973 and 1982, in part because of spikes in energy prices and implementation of costly but
necessary environmental and workplace regulations. After 1982 productivity growth picked up,
especially between 1995 and 2005, due primarily to information technology. But since 2005,
productivity growth has slowed down perhaps because of uncertainty created by the Great Recession.
Labor productivity growth is key to a higher standard of living, as reflected by per capita income and
output. Among the seven major industrial market economies, the United States has experienced the
second highest growth rate in real GDP per capita over the last two decades and most recently
produced the highest real GDP per capita.
8-3 Evaluate the evidence that technological change increases the unemployment rate.
Technological change sometimes costs jobs in the short run when workers fail to adjust. Over time,
however, most displaced workers find other jobs, sometimes in new industries created by
technological change. There is no evidence that, in the long run, technological change increases
unemployment in the economy. Some governments use industrial policy in an effort to nurture
the industries and technologies of the future, giving domestic industries an advantage over foreign
competitors. But critics are wary of the government’s ability to pick the winning technologies of
the future.
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-6 FOR THE FOLLOWING SECTION

Theory of Productivity and Growth
Growth and the Production Possibilities Frontier
 Outward shift in the PPF caused by:
 greater availability of resources
 improvement in the quality of resources
 technological changes that make better use of resources
 improvements in the “rules of the game” that enhance production

What Is Productivity? Ratio of total output to a specific measure of input.
Labor Productivity: Output per unit of labor, measured as real GDP divided by the hours of labor used to
produce the output

Per-Worker Production Function
 Relationship between the amount of capital per worker and the output per worker.
 Slope of the curve (per-worker production function): Positive because an increase in capital per
worker helps each worker produce more output. The diminishing slope reflects the law of
diminishing marginal returns from capital: As the quantity of capital increases, the output per worker
increases at a diminishing rate.
 Capital deepening is an increase in the quantity of capital per worker.
Technological Change: Usually improves the quality of capital. As technological breakthroughs become
embodied in new capital, resources are combined more efficiently, increasing total output.
Rules of the Game: the formal and informal institutions that promote economic activity.

Productivity and Growth in Practice
 The U.S. produces about 150 times the per capita output of the world’s poorest countries
 Industrial market countries (economically advanced capitalist countries) versus developing countries
(lower standard of living due to less human and physical capital)

Education and Economic Development
U.S. Labor Productivity
 Small differences in productivity can make huge differences in the economy’s ability to produce and,
therefore, on the standard of living.
Slowdown and Rebound in Productivity Growth
Productivity growth in the U.S. rebounded from 1974-1982 and from 1983-1995 averaged 1.8%. From
1996 to 2010, productivity growth averaged 2.7%. The growth during this time is partly attributed to the
information revolution powered by the computer chip.

Output per Capita: real GDP divided by population indicates how much an economy produces on
average per resident.
Output per capita increases if:
1) Labor productivity increases for a given worker-population ratio
2) Worker-population ratio increases for a given labor productivity
3) Both worker-population ratio and labor productivity increase

International Comparisons
 U.S. is at the top of other countries, with a per capita income 20% above second-ranked Canada.
 Among the seven major industrial market economies, the United States has experienced the third
highest growth rate in real GDP per capita over the last thirty years.
USE POWERPOINT SLIDE 29 FOR THE FOLLOWING SECTION

Does Technological Change Lead to Unemployment?
 Some fear that if technological change reduces the labor needed to produce a given amount of output,
it can lead to unemployment in some industries.
 But technological change can make products more affordable.
 Change may displace workers in short run, but long-term benefits include higher real incomes and
more leisure.

Research and Development
Improvements in technology arise from scientific discovery.
 Basic Research: The search for knowledge without regard to how that knowledge will be used.
 Applied Research: Seeks to answer particular questions or apply scientific discoveries to the
development of specific products.
 Expenditures for Research and Development: R&D spending as a percentage of GDP
USE POWERPOINT SLIDE 32 FOR THE FOLLOWING SECTION

Industrial Policy: The idea that government, using taxes, subsidies, regulations, and coordination of the
private sector, can help nurture industries and technologies of the future to give domestic industries an
advantage over foreign competitors..
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Do Economies Converge?
 Convergence theory: Developing countries can grow faster than advanced ones and should
eventually close the gap.
– Leading countries such as the United States find growth limited by the rate of creation of new
knowledge and better technology, but follower countries can grow more quickly by closing the
technological gap.
 Convergence may not occur because of:
– In the poorest economies, birth rates are double those in wealthier countries.
– Vast differences in the quality of human capital across countries.
– Lack of a stable macroeconomic environment and established institutions to nurture economic
growth.
CHAPTER SUMMARY
If the population is continually increasing, an economy must produce more goods and services simply to
maintain its standard of living, as measured by output per capita. If output grows faster than the
population, the standard of living rises.
An economy’s standard of living grows over the long run because of (a) increases in the amount and
quality of resources, especially labor and capital, (b) better technology, and (c) improvements in the rules
of the game that facilitate production and exchange, such as tax laws, property rights, patent laws, the
legal system, and customs of the market.
The per-worker production function shows the relationship between the amount of capital per worker in
the economy and the output per worker. As capital per worker increases, so does output per worker, but at
a decreasing rate. Technological change and improvements in the rules of the game shift the per-worker
production function upward, so more is produced for each ratio of capital per worker.
Since 1870, U.S. labor productivity growth has averaged 2.2 percent per year. The quality of labor and
capital is much more important than the quantity of these resources. Labor productivity growth slowed
between 1974 and 1982, in part because of spikes in energy prices and implementation of costly
regulations necessary to protect the environment and improve workplace safety. Since 1983 productivity
growth has picked up, especially since 1996, due primarily to information technology.
Among the seven major industrial market economies, the United States has experienced the third highest
growth rate in real GDP per capita over the last thirty years and most recently experienced the highest real
GDP per capita.
Technological change sometimes costs jobs and imposes hardships in the short run, as workers scramble to
adjust to a changing world. Over time, however, most displaced workers find other jobs, sometimes in new
industries created by technological change. There is no evidence that, in the long run, technological
change increases unemployment in the economy.
Some governments use industrial policy in an effort to nurture the industries and technologies of the
future, giving domestic industries an advantage over foreign competitors. But critics are wary of the
government’s ability to pick the winning technologies of the future.
Convergence is a theory predicting that the standard of living around the world will grow more alike as
poorer countries catch up with richer ones. Some Asian countries that had been poor are catching up with
the leaders, but many poor countries around the world have failed to close the gap.
TEACHING POINTS
1. This chapter shifts from short-run stabilization concerns to the long-run goals and performance of
the economy. Central to the notion of successful growth is the idea of investment in capital,
education, and research and development. The chapter considers at length the determinants of labor
productivity as well as overall economic growth. Each of these is tied to saving and investment
of some sort.
2. Some students may be accustomed to thinking that technology replaces labor in the production
process. You should emphasize two important considerations. First, not all technology acts as a
substitute for labor; some requires additional labor for operation and maintenance but still produces
more output per worker. Second, if some technology does replace labor, this labor will usually find
an outlet producing other products, thus increasing the national output. In the long run, technological
change makes labor more productive and consequently increases living standards.
3. It is probably important to mention that a better-educated (more highly skilled) labor force also
requires thrift on the part of society. Society must divert current resources to build educational
facilities and research centers. On the individual level, each person must sacrifice leisure to obtain
the desired skills or education.
4. Students should be led through the discussion of the per-worker production function. The effects
on output per capita of both changes in the size of the labor force and the growth rate of productivity
should be discussed. If employment grows faster than the population as a whole, output per capita
can increase faster than productivity per worker. With a higher percentage of the population working,
output per capita can grow faster than output per worker.
5. In discussing the theory of convergence, it is important to emphasize the factors that may keep a
developing economy from converging with an industrial economy. Those factors include (1) higher
birth rates, (2) differences in quality of human capital, and (3) an unstable macroeconomic
environment.
SOLUTIONS TO PROBLEMS APPENDIX
1. (Measuring Labor Productivity) How do we measure labor productivity? How do changes in

labor productivity affect the U.S. standard of living?
If the population is continually increasing, an economy must produce more goods and
services simply to maintain its standard of living, as measured by output per capita. If output
grows faster than the population, the standard of living rises. The per-worker production
function shows the relationship between the amount of capital per worker in the economy
and the output per worker. As capital per worker increases, so does output per worker but at
a decreasing rate. Technological change and improvements in the rules of the game shift the
per-worker production function upward.
2. (Growth and the PPF) Use the production possibilities frontier (PPF) to demonstrate economic
growth.
a. With consumption goods on one axis and capital goods on the other, show how the
combination of goods selected this period affects the PPF in the next period.
b. Extend this comparison by choosing a different point on this period’s PPF and
determining whether that combination leads to more or less growth over the next period.
a. An economy that produces more capital goods than consumer goods (point A on Graph A
below) will grow more in the future as reflected by the shifting out of the production
possibilities frontier from CI to CI.
b. If a point (B in Graph B) had been chosen, which produced more consumption goods
and thus less capital goods than point A in Graph A, this country would not have
experienced as much future growth. The production possibilities curve would only have
shifted out a little, to C"I".
3. (Shifts in the PPF) Terrorist attacks foster instability and may affect productivity over the
short and long term. Do you think the September 11, 2001, terrorist attacks on the World
Trade Center and the Pentagon affected short- and/or long-term productivity in the United
States? Explain your response and show any movements in the PPF.
The attacks affected short-term productivity because production capabilities for some sectors,
especially financial services in the New York area, were negatively impacted by personnel
killed and injured, resources destroyed, and the time spent repairing facilities and relocating.
Long-term productivity may have been affected if businesses chose to set up elsewhere or
found production required more resources than in the past. Reactions to the disaster have led
to technological and other changes which ultimately enhance production capabilities.
Any loss of productivity shifts the curve inward (or leftward) while improvements lead to a
rightward shift.
4. (Labor Productivity) Identify at least four definable periods of labor productivity growth
beginning right after World War II. During which periods was productivity growth lowest
and why? (Refer to Exhibit 6 in the chapter.)
Between World War II and 1973, labor productivity was strong, averaging 2.8 percent.
Labor productivity growth slowed between 1973 and 1982, in part because of spikes in
energy prices and implementation of costly but necessary environmental and workplace
regulations. After 1982 productivity growth picked up, especially between 1995 and 2005,
due primarily to information technology. But since 2005, productivity growth has slowed
down perhaps because of uncertainty created by the Great Recession. Labor productivity
growth is key to a higher standard of living, as reflected by per capita income and output.
Among the seven major industrial market economies, the United States has experienced the
second highest growth rate in real GDP per capita over the last two decades and most
recently produced the highest real GDP per capita.
5. (Long-Term Productivity Growth) Suppose that two nations start out in 2012 with identical
levels of output per work hour—say, $100 per hour. In the first nation, labor productivity
grows by 1 percent per year. In the second, it grows by 2 percent per year. Use a calculator or a
spreadsheet to determine how much output per hour each nation will be producing 20 years
later, assuming that labor productivity growth rates do not change. Then, determine how much
each will be producing per hour 100 years later. What do your results tell you about the effects
of small differences in productivity growth rates?
Over long periods, small differences in productivity growth rates have significant impacts on
the economy’s ability to produce and, therefore, on the standard of living. The following
table shows that a 1 percent growth rate in the productivity of labor causes the value of the
output per worker to rise from $100 to $122 in 20 years. However, if the growth rate of
output is 2 percent, the increase in the value of the productivity of the worker is much larger,
rising from $100 to $149 in 20 years. After 100 years, the change in the value of labor’s
productivity is even more pronounced for the higher growth rate. At 1 percent, the value has
risen to $270, whereas at a growth rate of 2 percent, the value has risen to $724. Just a 1
percentage point difference in growth rate creates a $454 dollar difference in value over 100
years. At a 1 percent growth rate over 100 years, the value increases by 2.7 times its original
value. At a 2 percent growth rate, the value increases by over 7 times its original value.
1% Rate of Growth 2% Rate of Growth

Year in Output per Worker in Output per Worker
2012 $100 $100
2013 $101 $102
2014 $102 $104
2015 $103 $106
2016 $104 $108
2017 $105 $110
2018 $106 $113
2019 $107 $115
2020 $108 $117
2021 $109 $120
2022 $110 $122
2023 $112 $124
2024 $113 $127
2025 $114 $129
2026 $115 $132
2027 $116 $135
2028 $117 $137
2029 $118 $140
2030 $120 $143
2031 $121 $146
2032 $122 $149 20 years
--- --- --- ---
2112 $270 $724 100 Years
6. (Technological Change) Does technological change create unemployment? What’s the

evidence?
Technological change sometimes costs jobs in the short run when workers fail to adjust.
Over time, however, most displaced workers find other jobs, sometimes in new industries
created by technological change. There is no evidence that, in the long run, technological
change increases unemployment in the economy. Some governments use industrial policy in
an effort to nurture the industries and technologies of the future, giving domestic industries
an advantage over foreign competitors. But critics are wary of the government’s ability to
pick the winning technologies of the future.
7. (Technological Change and Unemployment) What are some examples, other than those given
in the chapter, of technological change that has caused unemployment? And what are some
examples of new technologies that have created jobs? How do you think you might measure
the net impact of technological change on overall employment and GDP in the United States?
Technological change in the banking industry has reduced the need for bank tellers. ATM
machines, debit cards, and electronic banking perform most of the tasks a bank teller once
performed. At the same time, the new technology of the banking industry has created a need
for management information systems experts and technicians and for calm, verbal people to
explain the system to a worried, frustrated, confused customer trying to bank in this new
“virtual” banking system. Often the technological change decreases the need for certain
positions but creates new positions to facilitate and carry out the new technology.
Both the growth rate of GDP and the direction of change and the level of the unemployment
rate can give some measure of the net impact of technological change on overall employment
and GDP in the United States. If unemployment rates have fallen in the last year, there is no
evidence that technological change has caused a loss of jobs. In fact, a lower unemployment
rate usually means that there are more jobs in the economy. If the rate of growth of real GDP
was positive and strong during the last year, there is evidence of growth in income and the
standard of living.
Experiential Assignments
1. Send students to the Bureau of Labor Statistics (BLS) page on Quarterly Labor Productivity at
http://www.bls.gov/lpc/ to get the latest news release on productivity and costs. Have them rank
the various sectors of the U.S. economy from highest to lowest according to their most recent
productivity growth rates. Ask them if what they found makes sense to them. Why or why not?
2. The BLS also compiles international data on manufacturing productivity at

http://stats.bls.gov/news.release/prod4.toc.htm. Ask students to find which nations have enjoyed the
most rapid growth in manufacturing productivity for the most recent period. Which nations have
experienced the slowest growth? Has productivity actually declined anywhere? How could this be
related to the convergence theory explained in this chapter?
3. Technological change is an important driver of economic growth. Ask students to find a story
about a recent innovation in the “Technology” column in the Wall Street Journal Marketplace
section. How will this innovation affect the U.S. production possibilities frontier? Does it seem likely
to affect employment as well? If so, which types of workers will be harmed, and which will benefit?

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ECON MACROECONOMICS 4 4TH EDITION

In this chapter, you will find:

CHAPTER OUTLINE WITH POWERPOINT SCRIPT

USE POWERPOINT SLIDES 2-6 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 7-9 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 10-14 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 15-17 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 18-23 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 24-25 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 26-28 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDE 29 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 30-31 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDE 32 FOR THE FOLLOWING SECTION

USE POWERPOINT SLIDES 33-35 FOR THE FOLLOWING SECTION

SOLUTIONS TO PROBLEMS APPENDIX

1. (Measuring Labor Productivity) How do we measure labor productivity? How do changes in

1% Rate of Growth 2% Rate of Growth

6. (Technological Change) Does technological change create unemployment? What’s the

2. The BLS also compiles international data on manufacturing productivity at

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