1. 17 - 1
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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ECONOMIC
GROWTH AND
THE NEW
ECONOMY
17C H A P T E R

2. 17 - 2
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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•Increases in the Quantity &
Quality of Natural Resources
•Increases in the Quantity &
Quality of Human Resources
•Increases in the Supply (or
Stock) of Capital Goods
•Improvements in Technology
GROWTH ECONOMICS
Supply Factors

3. 17 - 3
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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•Households, Businesses, and
Government Must Purchase the
Economy’s Expanded Output
GROWTH ECONOMICS
Demand Factor
Efficiency Factor
•The Economy Must Achieve
Economic Efficiency as well as
Full-Employment

4. 17 - 4
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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PRODUCTION POSSIBILITIES ANALYSIS
Economic
GrowthA
B
C
D
a
b
CapitalGoods
Consumer Goods

5. 17 - 5
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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PRODUCTION POSSIBILITIES ANALYSIS
Growth and Production
Possibilities
Labor and Productivity
Worker-Hours
Labor-Force Participation
Rate
Labor Productivity
Real GDP =
Worker
Hours
X
Labor
Productivity

6. 17 - 6
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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•Size of
employed labor
force
•Average hours
of work
•Technological
advance
•Quantity of capital
•Education and
training
•Allocative efficiency
•Other
REAL
GDP
SUPPLY DETERMINANTS
OF REAL OUTPUT
Labor
Inputs
(Hours
of Work)
Labor
Productivity
(Average
Output
Per Hour)
X =

7. 17 - 7
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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GROWTH IN THE AD-AS MODEL
Production Possibilities and
Aggregate Supply
Extending the AD-AS
Model

8. 17 - 8
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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GROWTH IN THE AD-AS MODEL
A
B
C
D
CapitalGoods
Consumer Goods
PriceLevel
Real GDP
ASLR1 ASLR2
Q1 Q2

9. 17 - 9
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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ECONOMIC GROWTH IN THE
EXTENDED AD – AS MODEL
PriceLevel
Real GDP
o
P1
AS2
ASLR1
AD2
Q1
ASLR2
Q2
AD1
AS1
P2

10. 17 - 10
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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U.S. Economic Growth,
Annual Averages for Five Decades
1950-1959 1960-1969 1970-1979 1980-1989 1990-1999
U.S. ECONOMIC GROWTH RATES
5
4
3
2
1
0
Real GDP Real GDP Per Capita
AverageAnnualIncrease(Percent)

11. 17 - 11
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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ACCOUNTING FOR GROWTH
Inputs versus Productivity
Quantity of Labor
Technological Advance
Quantity of Capital
Infrastructure
Education and Training
Human Capital

12. 17 - 12
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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ACCOUNTING FOR GROWTH
Increase in quantity of labor 33%
Increase in labor productivity 67%
Technological advance 26%
Quantity of capital 18%
Education and training 11%
Economies of scale 6%
Improved resource
allocation 6%
100%
Sources of Growth of U.S. Output, 1929-2000

13. 17 - 13
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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Changes in the Educational Attainment
of the U.S. Adult Population
1950 1960 1970 1980 1990 2000
100
80
60
40
20
0
College Graduates or More High School Graduates or More
ACCOUNTING FOR GROWTH
Source: U.S. Census Bureau
PercentofU.S.Population

14. 17 - 14
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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ACCOUNTING FOR GROWTH
Economies of Scale
Improved Resource
Allocation
Other Factors

15. 17 - 15
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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PRODUCTIVITY GROWTH
AND THE NEW ECONOMY
Characteristics of the New
Economy
•Microchip and
Information Technology
•New Firms and
Increasing Returns
•Start-Up Firms

16. 17 - 16
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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PRODUCTIVITY GROWTH
AND THE NEW ECONOMY
Sources of Increasing Returns
• More Specialized Inputs
• Spreading of Development
Costs
• Simultaneous Consumption
• Network Effects
• Learning by Doing
Global Competition

17. 17 - 17
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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PRODUCTIVITY GROWTH
AND THE NEW ECONOMY
Macroeconomic Implications
• Faster Noninflationary
Growth
• Low Natural Rate of
Unemployment
• Growing Tax Revenues
Skepticism About the New
Economy

18. 17 - 18
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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GLOBAL PERSPECTIVE
Growth Competitiveness Ranking 2000
Source: World Economic Forum
1
2
3
4
5
6
7
8
9
10
United States
Singapore
Luxembourg
Netherlands
Ireland
Finland
Canada
Hong Kong, China
United Kingdom
Switzerland
Rank

19. 17 - 19
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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IS GROWTH DESIRABLE
AND SUSTAINABLE?
The Antigrowth View
In Defense of
Economic Growth
Chapter Conclusions

20. economic growth
supply factors
demand factor
efficiency factor
labor productivity
labor-force participation
rate
infrastructure
human capital
economies of scale
New Economy
information technology
start-up firms
increasing returns
network effects
learning by doing
ENDBACKCopyright McGraw-Hill/Irwin 2002

21. 17 - 21
Copyright McGraw-Hill/Irwin, 2002
Growth Economics
Production Possibilities Analysis
Supply Determinants of Real Output
Growth in the AD-AS Model
U.S. Economic
Growth Rates
Accounting for
Growth
Productivity Growth
in the New Economy
Key Terms
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Deficits,
Surpluses
and the
Public Debt
Chapter 18 Next...