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Chapter Outline
179
Chapter 24 Chapter — Chapter 9
Comprehensive Micro Macro
India and China are noted as the economic superpowers from the first millennia into
the 18th century. However, after the mid-18th century, Western Europe and North Ameri-
ca suddenly broke away from the pack with a dramatic acceleration of GDP growth.
GDP per capita is introduced as a concept to illustrate just how dramatic growth in the
20th century has been compared to centuries past. The roughly five-fold increase in
GDP per capita from $1,252 in 1900 to $6,055 in 2000 makes prior growth seem trivial in
comparison.
A generous portion of empirical evidence is presented to set up the question “What
Caused the Upsurge?” Ask students why economic growth began its acceleration in the
mid-18th century. At least a few must have some familiarity with British industrialization.
Ask them about their impressions of the British Industrial Revolution. The famous British
economic historian T.S. Ashton’s student replied to a similar question that ‘it was a wave
of gadgets.’ Hopefully, someone will point out the new inventions of the period, then it is
possible to discuss how invention and innovation take place. The openness to new
ideas that characterized the enlightenment alongside the scientific advances of the pe-
riod cannot be overstated as the root causes of the acceleration of economic growth.
Discussion then shifts to modern economic growth, which can be characterized
graphically as a shift to the right of the familiar aggregate supply curve. Modern eco-
nomic growth requires security of property rights. A market system that operates freely
is another institution that contributes enormously to economic growth. Expanding mar-
kets are associated with technological change. Adam Smith’s observation that the dis-
covery of America and the ability to sail around the Cape of Good Hope to Asia were, up
to Smith’s time, the “two greatest and most important events” reinforces the idea that
free markets and innovation go hand-in-hand.
Causes of economic growth and a simple capital-deepening model of economic
growth are presented. Technological change is illustrated as an upward shift in the out-
put per worker function. The role of labor supply and saving in the growth process are
noted.
The chapter returns to an empirical examination of the recent record of productivity
growth and economic growth in the United States. Students should find the discussion –
along with the tables, and graph – of “How Economic Growth Affects Your Life,” fascinat-
ing as well as informative. It compares the comforts of life in early 20th century to our
comforts now, and the costs of acquiring them. How many minutes of work does it take
to earn a chicken, now and then. This is probably the most down-to-earth kind of discus-
sion that students will see as a measure of performance and success. It is an excellent
entry into a discussion of what economic growth really means.
2. The superpowers centuries ago were China and India. Today, the superpowers are
the industrialized nations in North America, Western Europe, and Japan. The
change occurred as a result of industrialization in Western Europe and the United
States during the late 18th and 19th centuries. Other countries/regions are now ex-
periencing industrialization marked by an acceleration in growth.
4. An increase in real GDP means that total output in an economy increases. An in-
crease in real per capita GDP means that output per person increases. For real per
capita GDP to increase, real GDP must grow faster than population. Real per capi-
ta GDP has changed dramatically over the last two millennia with the greatest in-
creases coming in Western Europe, North America, and Japan while other regions
have experienced significant but smaller gains.
5. Before any production begins, you have some expected profitability in mind. That
profitability depends primarily upon your abilities. The efficiency associated with
your production depends upon you. What you cannot control is the political envi-
ronment in which you work. That environment is perhaps more reliable if your in-
vestment project is located in a politically stable country; but if the location is in a
country where political instability is the norm, political risk matters and may dramati-
cally affect the profitability of the project.
7. Capital deepening occurs when the capital to labor ratio increases. The capital
stock grows more rapidly than the labor force. For example, suppose steel workers
are equipped with larger furnaces in which to produce steel. As the size of the fur-
naces increase, output per worker increases, but at a diminishing rate, which re-
flects the law of diminishing returns.
8. A technological change causes output per worker to increase at every level of capi-
tal per worker. A technological change allows a given amount of inputs (capital and
labor) to produce a larger output. Therefore, the output per worker curve shifts up-
ward. An example might be to replace axes used by lumberjacks with chain saws.
10. Increases in labor skills can occur as workers become more proficient, often due to
increased time on the job or learning by doing. Labor skills also improve due to
special training and education. As a result of improved labor skills, labor productivi-
ty increases. For example, an accountant could work effectively with a calculator
and paper ledgers. However, by learning to use a computer spreadsheet program,
the accountant’s labor skills increase and productivity increases as a result.