Principles of Macroeconomics

Twelfth Edition

Chapter 16
Long-Run Growth

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Copyright

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Chapter Outline and Learning
Objectives
16.1 The Growth Process: From Agriculture to Industry
• Summarize the history and process of economic growth.
16.2 Sources of Economic Growth
• Describe the sources of economic growth.

16.3 Growth and the Environment and Issues of

Sustainability
• Discuss environmental issues associated with economic growth.

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Chapter 16 Long-Run Growth
• In this chapter, we will describe a brief history of economic
growth, the sources of growth, and discuss the
environmental issues associated with growth.
• output growth The growth rate of the output of the entire
economy.
• per-capita output growth The growth rate of output per
person in the economy.
• labor productivity growth The growth rate of output per
worker.

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The Growth Process: From Agriculture
to Industry (1 of 2)
• Beginning in England around 1750, technical change and
capital accumulation increased productivity significantly in
agriculture and textiles.
• New inventions and new machinery meant that more could
be produced with fewer resources.
• Growth meant new products, more output, and wider
choice.
• A rural agrarian society was quickly transformed into an
urban industrial society.
• Growth comes from a bigger workforce and more
productive workers.
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The Growth Process: From Agriculture
to Industry (2 of 2)
• 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.
• The idea that gaps in national incomes tend to close over
time is called convergence theory.
• An economic historian coined the term advantages of
backwardness to describe the phenomenon of less
developed countries leaping ahead by borrowing
technology from more developed countries.

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FIGURE 16.1 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.

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TABLE 16.1 Growth of Real GDP: 1996–2013

MyEconLab Real-time data

Country Average Growth Rates per

Year, Percentage Points,
1996-2013
United States 2.4
Japan 0.8
Germany 1.3
France 1.6
United Kingdom 2.1
China 9.6
India 6.8
Sub-Saharan Africa 5.6

Source: Economic Report of the President, 2015, Table B-4

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Sources of Economic Growth
• aggregate production function A mathematical
relationship stating that total GDP (output) depends on the
total amount of labor used and the total amount of capital
used.
• Consider the simple hypothetical production function:
Y  3  K 1/3 L2/3
• Both capital and labor are needed for production, and
increases in either result in more output.

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ECONOMICS IN PRACTICE
Government Strategy for Growth

• The distance from the technological

frontier might influence growth strategies
pursued by that country.

• The government knows what the right

technology is and can help its firms find
the world frontier through innovation.

• For this reason, policies to support

entrepreneurship and improve the
workings of venture capital will likely work
better.

THINKING PRACTICALLY

1. In recent years China has begun to strengthen its laws on patents. How does this fit in
with the research described here?

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Increase in Labor Supply
• In the absence of increases in the capital stock, as labor
increases, less and less output will be added by each new
worker. This effect is called diminishing returns.
• With diminishing returns, as labor supply grows, output
increases but at a declining rate, and increases in the labor
supply reduce labor productivity, or output per worker.

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TABLE 16.2 Economic Growth from an Increase in Labor: More
Output but Diminishing Returns and Lower Labor Productivity

Period Quantity Quantity Total Labor Marginal

of labor of Outpu Productivity Return
L Capital t Y/L to Labor
K Y ΔY/ΔL

1 100 100 300 3.0 -

2 110 100 320 2.9 2.0
3 120 100 339 2.8 1.9
4 130 100 357 2.7 1.8

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TABLE 16.3 Employment, Labor Force, and Population Growth,
1960–2014

MyEconLab Real-time data

Source: Economic Report of the President, 2015, Table B-11.

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Increase in Physical Capital
• There are diminishing returns to capital when more and
more capital is added to a fixed supply of labor.
• New capital can come from the saving of a country’s
residents and/or from the investments of foreigners.
• foreign direct investment (FDI) Investment in
enterprises made in a country by residents outside that
country.
• Countries with poor institutions, corruption, and inadequate
protection for lenders and investors struggle to attract
capital. The World Bank calls them fragile countries.

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TABLE 16.4 Economic Growth from an Increase in Capital: More
Output, Diminishing Returns to Added Capital, Higher Labor
Productivity

Period Quantit Quantit Total Labor Output Marginal

y of y of Output Product per Return to
labor Capital Y ivity capital Labor
L K Y/L Y/K ΔY/ΔL
1 100 100 300 3 3 -
2 110 110 310 3.1 2.8 1
3 100 120 319 3.2 2.7 0.9
4 100 130 327 3.3 2.5 0.8

• Observe that (1) additional capital increases labor productivity and (2) there are
diminishing returns to capital.

• The last column in the table shows the decline in output per capital as capital is
increased

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 TABLE 16.5 Fixed Private Nonresidential Net Capital Stock, 1960–
2013 (Billions of 2009 Dollars)

  Equipment Structures
1960 706.1 3,451.30
1970 1,202.00 4,769.30
1980 1,994.00 6,294.80
1990 2,629.00 8,336.50
2000 4,039.40 9,808.90
2010 5,208.20 10,967.00
2013 5,605.80 11,151.80
Total percentage change, 1960–2013 +693.9% +223.1%
Percentage change at an annual rate +4.0% +2.2%

Source: U.S. Department of Commerce, Bureau of Economic Analysis., Fixed Asset Tables

• Between 1960 and 2013 the stock of equipment grew at an annual rate of 4.0% and the
stock of structures grew at an annual rate of 2.2%.
• Notice that the growth rates of capital in this table are larger than the growth rates of
labor in Table 16.3. So, capital has grown relative to labor.

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Increase in the Quality of the Labor
Supply (Human Capital)
• The level of educational attainment in the United States
has risen significantly since 1940.
• As the quality of labor increases through more education,
labor productivity increases.
• Policy makers in many developed economies are
concerned about their ability to continue to generate
growth through human capital improvements.

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TABLE 16.6 Years of School Completed by People Older Than 25
Years, 1940–2014

Percentage with Percentage with Percentage with 4

Less than 5 Years 4 Years of High Years of College
  of School School or More or More
1940 13.7 24.5 4.6
1950 11.1 34.3 6.2
1960 8.3 41.1 7.7
1970 5.5 52.3 10.7
1980 3.6 66.5 16.2
1990 NA 77.6 21.3
2000 NA 84.1 25.6
2010 NA 87.1 29.9
2014 NA 88.1 32
NA = not available

Source: Statistical Abstract of the United States, 1990, Table 215, and 2012, Table
229, and Bureau of the Census, 2014, Table 2,Educational Attainment.

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ECONOMICS IN PRACTICE
German Jewish Émigrés Contribute to U.S. Growth

• By the time World War II began, more

than 133,000 Jewish émigrés had
found their way to the United States.
Among those émigrés were some
chemists who brought with them
considerable human capital.

• Looking at the rate of patenting in the

United States in the period before the
emigration with the emigration right
after, two economists found that these
new U.S. citizens may have increased
patent rates in their fields by more than
30%.

THINKING PRACTICALLY

1. Show on a production possibility frontier the effects of the new German emigration.

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Increase in the Quality of Capital
(Embodied Technical Change)
• embodied technical change Technical change that
results in an improvement in the quality of capital.
• An increase in the quality of capital increases labor
productivity.
• The quality of capital has increased because of embodied
technical change.

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Disembodied Technical Change
• disembodied technical change Technical change that
results in a change in the production process.
• Since disembodied technical changes are mostly positive,
labor productivity has increased when people have figured
out how to run production processes and how to manage
firms more efficiently.

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More on Technical Change (1 of 2)
• invention An advance in knowledge.
• innovation The use of new knowledge to produce a new
product or to produce an existing product more efficiently.
• A commonly used measure of inputs into research is the
fraction of GDP spent.

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More on Technical Change (2 of 2)
• The United States will lose some of its edge in technology
unless more funding is provided, but the National
Academies of Science argued:
Although many people assume that the United States will
always be a world leader in science and technology, this
may not continue to be the case inasmuch as great minds
and ideas exist throughout the world. We fear the
abruptness with which a lead in science and technology
can be lost—and the difficulty of recovering a lead once
lost, if indeed it can be recovered at all.

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U.S. Labor Productivity: 1952 I–2014 IV
FIGURE 16.2 Output per Worker Hour (Productivity), 1952 I–2014 IV

MyEconLab Real-time data

There was a slowdown in productivity growth in the 1970s. Some of the explanations for
this slowdown included a low rate of saving, environmental and government regulation, and
little spending on R&D. Many of these factors turned around in the 1980s and 1990s, and
productivity rose to 2.0% in the 1990s through 2014.
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Growth and the Environment and Issues
of Sustainability (1 of 3)
TABLE 16.7 Environmental Scores in the World Bank Country Policy and
Institutional Assessment 2005 Scores (min = 1, max = 6)
Countries Scores
Albania 3 • The scores in this table
Angola 2.5 include factors such as
Bhutan 4.5 education, mortality, and
Cambodia 2.5 income growth.
Cameroon 4
Gambia 3 • A set of environmental criteria
Haiti 2.5 including clean air, clean
Madagascar 4 water, and conservation
Mozambique 3 management is also taken into
Papua New Guinea 1.5 account.
Sierra Leone 2.5
Sudan 2.5
Tajikistan 2.5
Uganda 4
Vietnam 3.5 Source: International Bank for Reconstruction and
Zimbabwe 2.5 Development / The World Bank: World Development
Indicators Database 2005.

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Growth and the Environment and Issues
of Sustainability (2 of 3)
• 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 issues: Because
extraction can be accomplished without a well-educated
labor force, public investment in infrastructure is especially
important.
• The question of whether the natural resource base
imposes strong natural limits on growth has been debated
since the time of Malthus.

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FIGURE 16.3 The Relationship between Per-Capita GDP
and Urban Air Pollution

Source: Gene Grossman and Alan Krueger, QJE, May 1995.

• 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.

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Growth and the Environment and Issues
of Sustainability (3 of 3)
• In 1972, the Club of Rome released a study titled The Limits
to Growth, which suggested that the entire world economy
would reach its limits sometime after the year 2000:
Collapse occurs because of nonrenewable resource depletion. The
industrial capital stock grows to a level that requires an enormous input
of resources. In the very process of that growth, it depletes a large
fraction of the resource reserves available. As resource prices rise and
mines are depleted, more and more capital must be used for obtaining
resources, leaving less to be invested for future growth. Finally,
investment cannot keep up with depreciation and the industrial base
collapses, taking with it the service and agricultural systems, which have
become dependent on industrial inputs (such as fertilizers, pesticides,
hospital laboratories, computers, and especially energy for
mechanization)....Population finally decreases when the death rate is
driven upward by the lack of food and health services.

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REVIEW TERMS AND CONCEPTS
• aggregate production function

• catch-up

• disembodied technical change

• embodied technical change

• foreign direct investment (FD)

• innovation

• invention

• labor productivity growth

• output growth

• per-capita output growth

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