Growth, Productivity and the Wealth of Nations

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Growth, Productivity and the Wealth of Nations
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Growth, Productivity and the Wealth of Nations

• Sources of Growth
• Available Resources
• Incentives compatible with growth
• Technological development
• Investment in capital
• Entrepreneurship

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Growth, Productivity and the Wealth of Nations

• Available Resources
• Land, Labor and Capital are the fundamental types
  of resources.
• Nations with an abundance of one type can trade
  for more of another type if needed.
• Technology can create new resources and displace
  others (e.g. Solar, electrical or hydrogen power
  might replace gasoline as the fuel of choice in
  cars, trucks, busses.)

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Growth, Productivity and the Wealth of Nations

• Sources of Growth
• Available Resources
• Incentives compatible with growth
• Technological development
• Investment in capital
• Entrepreneurship

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Growth, Productivity and the Wealth of Nations

• Incentives Compatible with Growth
• Incentives that lead people to work.
• Incentives that promote business creation and
  expansion.
• Incentives that promote technological
  development.
• Incentives that promote entrepreneurship.

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Growth, Productivity and the Wealth of Nations

• Sources of Growth
• Available Resources
• Incentives compatible with growth
• Technological development
• Investment in capital
• Entrepreneurship

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Growth, Productivity and the Wealth of Nations

• Technological Development
• New/improved goods and services
• Enhance the quality/satisfaction
• Contribute to health and well-being
• Development of new tools, machines, or processes
  to enhance productivity
• Gains in efficiency permit increased productivity
  using fewer resources

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Growth, Productivity and the Wealth of Nations

• Sources of Growth
• Available Resources
• Incentives compatible with growth
• Technological development
• Investment in capital
• Entrepreneurship

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Growth, Productivity and the Wealth of Nations

• Investment in capital
• Physical capital (new buildings, machinery,
  tools)
• Human capital (development of human resources)
• Financial capital (monetary resources must be
  available to support the Investment objectives)

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Economic Growth

• Productivity Growth

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Growth, Productivity and the Wealth of Nations

• Sources of Growth
• Available Resources
• Incentives compatible with growth
• Technological development
• Investment in capital
• Entrepreneurship

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Growth, Productivity and the Wealth of Nations

• Entrepreneurship
• Entrepreneurship involves creativity, vision,
  risk taking, and the ability to translate the
  vision into reality.

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Growth, Productivity and the Wealth of Nations
U.S. Long-Term GDP Growth Trend
2.5 3.5 Average Annual Growth
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Growth, Productivity and the Wealth of Nations

• Economic growth means an increase in the amount
  of goods and services an economy produces.
• What is the potential level of output that an
  economy can produce given its use of available
  resources and technology?

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Growth, Productivity and the Wealth of Nations
Production Possibilities Frontier
Goods
The frontier is determined by the use and
availability of resources, technology and by the
constraints applied by society.
unattainable
1 2 3
inefficient
Services
0
1 2 3
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Growth, Productivity and the Wealth of Nations
Production Possibilities Frontier
Goods
Adam Smith suggested an economy could grow
through division of labor and through the free
exchange of goods and services.
unattainable
1 2 3
inefficient
Services
0
1 2 3
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The Great Depression
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Growth, Productivity and the Wealth of Nations
Production Possibilities Frontier
Goods
In the Great Depression the economy operated at a
much lower level. 25 of labor force was
unemployed, factories shut down, and farmers went
bankrupt.
unattainable
1 2 3
inefficient
Services
0
1 2 3
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Growth, Productivity and the Wealth of Nations
Production Possibilities Frontier
Goods
Why do we want more growth in the economy? Does
the rising tide lift all boats?
unattainable
1 2 3
inefficient
Services
0
1 2 3
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Growth, Productivity and the Wealth of Nations

• GDP per Capita
• The use of real GDP per capita as a measure of
  average living standards should be approached
  cautiously. Because real GDP per capita is a
  gross tally of products and services bought and
  sold in a given year, averaged across the
  population and adjusted for inflation, it does
  not take into account several societal conditions
  important in the determination of living
  standards.
• Other indicators have been developed that more
  fully account for these many factors. Some of
  these indicators include

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Growth, Productivity and the Wealth of Nations

• The Genuine Progress Indicator (GPI)This
  indicator extends beyond GDP measures by placing
  a value on non-market contributions such as
  childcare and other factors like income
  distribution. In addition, unlike real GDP per
  capita, it counts many economic transactions
  related to the depletion of capital, or pollution
  as costs rather than benefits to society.Source
  The Genuine Progress Indicator

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Growth, Productivity and the Wealth of Nations

• Human Development Index (HDI)The United Nations
  has developed this index to measure the progress
  of a country in human development, supplementing
  measures such as GDP. The HDI consists of three
  dimensions longevity, knowledge and standard of
  living, and is estimated for 174
  countries.Source Human Development Report

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Growth, Productivity and the Wealth of Nations

• Other Indicators
• Friends of the Earth is working with the Centre
  for Environmental Strategy (CES) and others to
  put forward alternative economic indicators to
  GDP. The most advanced is the Index of
  Sustainable Economic Welfare (ISEW), which has
  been calculated for 8 countries, and has just
  been revised in the UK by CES and Friends of the
  Earth. It corrects GDP over a range of issues
  such as, income inequality, environmental damage,
  and depletion of environmental assets, to create
  an indicator which better measures how our
  economy delivers welfare for people

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Growth, Productivity and the Wealth of Nations

• All of these measures of growth, or welfare,
  provide important indicators of progress or lack
  of progress for a nation.
• Market economies, while imperfect engines of
  growth and welfare, do make the production
  process more efficient when competition is
  present. This efficiency increases output and
  lowers prices which benefits everyone.

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Growth, Productivity and the Wealth of Nations

• The Classical Theory of Growth

• Saving Investment Capital Stock
  Growth

Classical economists felt that saving by
Households, Businesses and Government is
necessary for an economy to grow. Objected to
deficit spending by Government.
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Growth, Productivity and the Wealth of Nations

• The Classical Theory of Growth

• Food supply increases mathematically 1,2,3,4

• Population expands geometrically 2,4,8,16

• Since land is finite there will come a time
  when growth will cease because the world cannot
  support more people.

Thomas Malthus 1766 - 1834
A View of Malthusian Ideas Today
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Growth, Productivity and the Wealth of Nations
Subsistence level of output
Diminishing Marginal Productivity of Labor
Output
Production function
Q 2 Q 1
L1 L2
Labor
At L 1 Output exceeds the Subsistence level
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Growth, Productivity and the Wealth of Nations

• Diminishing Marginal Productivity of Labor
• Classical predictions did not come true.
  Technological progress allowed fewer farm
  laborers to produce greater output. Labor, no
  longer needed on the farm, could be put to work
  producing other goods and services.

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Growth, Productivity and the Wealth of Nations

• Why Classical Predictions have not been realized.
• Definition of Labor is Ambiguous
• Two nations with equal labor force may experience
  different growth rates in part based on a
  differentials in education, skills, ability,
  opportunities.
• Thus a measure of human capital which takes
  these factors into account is better than a
  comparison based on number of laborers.

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Growth, Productivity and the Wealth of Nations

• Why Classical Predictions have not been realized.
• A nation with an advantage in capital formation
  does not remain stagnant. There is a continuous
  search for improved technology and processes that
  will provide new products and make existing
  products of better quality and lower price.

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Growth, Productivity and the Wealth of Nations
Evolution of Economic Systems
700 1000 1750 1900
Feudalism
Mercantilism
Capitalism
Capitalism
Soviet-Style Socialism
Industrial Revolution
Adam Smith (1723-90) J.B. Say (1776-1832)
Karl Marx (1818-1883)
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Growth, Productivity and the Wealth of Nations

• Karl Marx
• (1818-1883)
• Communism
• Workers will rise up and overthrow the
  capitalists

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Growth, Productivity and the Wealth of Nations

• Joseph A. Schumpeter
• (1883-1950)
• Described the Growth Process as one of Creative
  Destruction

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Business Cycles
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Civil War
WW I
WW II

Korean Conflict
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Vietnam War
0
Percentage Fluctuations in Real GDP

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Financial Panics
Great Depression

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1860 65 70 75 80 85 90 95 1900 05
10 15 20 25 30 35 40 45 50 55
60 65 70 75 80 85 90 95 2000
Y
ears
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Growth, Productivity and the Wealth of Nations
Production Possibilities Frontier
Goods

• New Growth Theory
• Emphasizes the role of new technology in the
  growth process.
• Advancement in technology is the result of
  economic decisions not just happenstance.

unattainable
1 2 3
inefficient
Services
0
1 2 3
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Growth, Productivity and the Wealth of Nations

• Policies that encourage Growth, Productivity and
  Wealth of Nations
• Policies to encourage saving and investment
• Tax incentives (401-K, 403-B, 457-B) etc.
• Policies to control population growth
• Birth control policies, immigration policies,
  etc.
• Policies to increase the level of education
• Kees funding, Pell Grant, etc.
• Policies to create institutions that encourage
  technological innovation
• Ministry of Industry and Trade

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Growth, Productivity and the Wealth of Nations

• Policies that encourage Growth, Productivity and
  Wealth of Nations
• Policies to Provide funding for basic research
• Support of research at leading universities
• Policies to increase the economys openness to
  trade
• WTO