AP Macro: Unit 6

“Economic Growth and Productivity”

                                                                                                        

Source:

Facts:

• In today’s dollars, the median American family income in 1909 was $8,000

• In 2009, the median American household’s income was about $50,000

• 50% of world population today has a lower standard of living than U.S. a century ago

• China and India have only recently achieved the standard of living of the U.S. a century ago

Growth Rates

• From 1909-2009, U.S. RGDP increased an average of 1.9% each year

• Rule of 70: tells how long it takes RGDP (or any other variable) to double

• Ex: U.S. RGDP grows at 2% per year. How long will it take for RGDP to double?

• 70/2 = 35 years

Sources of Long-run Growth

• The most important ingredient: rising (labor) PRODUCTIVITY

• Sustained growth in RGDP per capita occurs only when the amount of output produced by the average worker increases steadily

• RGDP/ number of people working

Why are we more productive than ever?

• Physical capital- today’s worker makes use of about $130,000 worth of physical capital; a backhoe can dig much more trench than a person equipped with a shovel

• Human capital- in 1910, 13.5% of Americans had graduated from high school and 3% had graduated from college. By 2009, the percentages were 86% and 27%, respectively

Productivity (continued)

• Studies show that education is an even more important determinant of growth in productivity than increases in physical capital

• Technology- probably the most important driver of productivity growth; small inventions like grocery bags and Post-It notes have contributed just as large inventions like the railroad and semi-conductor chip

Comparing Long Run Growth

• “East Asia’s Miracle:” South Korea, Taiwan, Hong Kong, Singapore, and China

• “Latin America’s Disappointment:” Argentina, Brazil, and Chile

• “Africa’s Troubles:” Nigeria and others south of the Sahara

East Asia

• Since 1975, the region has increase RGDP/capita by 6% per year (remember, the U.S. has grown at 2% per year)

• How? High national savings have allowed them to drastically increase physical capital per worker (the big “I” in GDP)

• Emphasis on education and technology increased human capital

Korea Advanced Institute of Science and Technology (KAIST)

East Asia (continued)

• “Catch-up effect-” it’s easier to narrow the productivity gap for countries with very low rates (easier to climb to the top than stay there)

• “Convergence hypothesis-” relatively poor countries should (and often do) have higher rates of growth in RGDP/capita than relatively rich countries; the gaps tend to narrow over time (this is evident in East Asia, but not necessarily in Latin America or Africa, however)

Latin America

• In 1900, regarded as economically viable, with GDP’s comparable to advanced countries

• Rich in minerals and cultivatable land; attracted immigrants from Europe

• Why stagnant growth? Low saving and investment, irresponsible gov’t policies and political instability; under-emphasis on education

• 1980’s- tried “laissez faire” approach, but only Chile has achieved notable growth since

Latin America

Africa

• Sub-Saharan Africa population: 780 million• Living standards lower than U.S. 200 yrs ago• Why? Political instability, savage civil wars• War and general anarchy has inhibited growth in

education and infrastructure• Property rights- extortion because of gov’t corruption

reduces incentive to own• Ray of light? Since mid-1990’s, Africa’s econ.

Performance has been better than previously because of markets such as oil and coffee

Keys to Economic Growth

• Adding to Physical Capital- spending higher % of GDP on investment

• 2009: investment spending was 44% of China’s GDP; in U.S. it was 18%

• Either domestic savings increases or there is an increase in foreign investment

• Saving and investment are crucial

Keys to Economic Growth

• Adding to Human Capital- emphasis on education

• Adding to Technological Progress- scientific knowledge must be transferred into useful products and processes

• Research and Development (R&D)- spending to create new technologies and prepare them for practical use

• Thomas Edison was R&D pioneer

Governments and Physical Capital

• Infrastructure- roads, ports, power lines, information networks, and other underpinnings for economic activity

• The big “G” in GDP; is expansionary fiscal policy used for infrastructure?