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AP Macro: Unit 6

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

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AP Macro: Unit 6

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  1. AP Macro: Unit 6 “Economic Growth and Productivity”

  2. Source:

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. Korea Advanced Institute of Science and Technology (KAIST)

  11. 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)

  12. 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

  13. Latin America

  14. 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

  15. 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

  16. 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

  17. 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?

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