UNIT IV STUDY GUIDE Unemployment and Inflation Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to: 4. Examine the effects of unemployment and inflation on the economy. Reading Assignment Chapter 7: Unemployment and Inflation Chapter 8: Productivity and Growth Unit Lesson One would think that unemployment and its measurement would make it easy to determine who is unemployed and what the national rate of unemployment is. However, it is a complex issue and one that has multiple factors for consideration. We will consider a few of the issues to tweak our interest for further readings. As of July 2015, the “U.S. unemployment rate drops to 6.1%” (Randle, 2014). Is this considered a good unemployment rate or a bad one? Is 6.1% a high number or a low number? Should the goal for political leaders be 0% unemployment? There are questions that need to be considered and are best viewed through economic theories. The definition of who is unemployed is agreed upon, but there is much argument about who should be included or excluded. Should a 16-year-old looking for a job be included or excluded? Should a 70-year-old, who just lost his or her job, and is actively looking for a job, be counted? What about a 62-year-old, who after years of trying to find a job, gives up and stops looking; should that person be counted? Oner (2010) gives a summary of definitions of who is unemployed. In the U.S., to be counted as unemployed one must be out of work and in active pursuit of a job, such as applying for jobs or sending out resumes. How does the government collect the unemployment statistics? Oner (2010) states that the government sends out a monthly survey of 100,000 individuals based on statistical sampling. This sample includes those looking for work and those that are unemployed. Yes, it is self-reported and is defined as the percentage looking for a job. Who is excluded from being considered unemployed? If one does want a job and is of working age, he or she is not included. If one has been unemployed for a long time and no longer looking for work, this group is not considered as unemployed. If one has a job that is part-time or is self-employed but did not receive pay in a prior pay period, these would be considered to be employed, and this can cause inflated employment numbers (Oner, 2010, para. 3-4). Consider the classifications for unemployment: frictional, seasonal, structural, and cyclical. By viewing through this scheme, one can grasp where unemployment is coming from and develop economic policies to address. Each classification above likely would take a different tactic to address. Frictional unemployment is essentially the time from when one loses one job until one finds find another job. This is considered natural and occurs as it takes time to interview, find a job, be selected, hired, and start work. The match between job market and worker finding each other is natural. BBA 2401, Principles of Macroeconomics 1 Seasonal unemployment occurs because a unique market may require more or lessxworkers UNIT STUDY during GUIDEpart of the year. For example, in south Florida fruit pickers are seasonal workers. In your Titleown area where you live, one will note the need for seasonal workers in many retail stores during December for the shopping season. Structural unemployment means that the workers in one area no longer have the skills needed for the current set of jobs in an area. For example, if in North Dakota there is an oil boom, and the demand is high for oil workers, but the current work force was trained to do textiles, this creates a mismatch or structural issue that must be addressed by training, labor force moving, or other types of structural adjustments. Cyclical unemployment comes because of expansions and contractions in the general economy. In a contraction, demand goes down, and the amount of labor needed to produce the goods and services that are being demanded, resulting in excess supply of labor, and thus, unemployment. As one studies the readings on unemployment and inflation, consider the economic factors, how these factors affect you, your family, your neighborhood, your country, and the world. View what you consider through the lenses of the models studied. References Oner, C. (2010). Back to basics: What constitutes unemployment? Finance & Development, 47(3), 48-49. Retrieved from http://www.imf.org/external/pubs/ft/fandd/2010/09/basics.htm Randle, J (2014, Jul 04). US unemployment rate drops to 6.1%. Voice of America. Retrieved from http://www.voanews.com/content/us-unemployment-rate-drops/1950501.html Suggested Reading Click here for the Chapter 7 Presentation in PowerPoint form. Click here to access a PDF version of the presentation. Click here for the Chapter 8 Presentation in PowerPoint form. Click here to access a PDF version of the presentation. Learning Activities (Non-Graded) The online tutorial below [link to MyCourseTools tutorial of same name] focuses on specific topics in Unit IV. The Costs of Inflation https://media.pearsoncmg.com/pcp/pls/pls_mycoursetools/fufillment/mct_1256689785_csu/prin_macro/redire ct_01_pm_l09_t03.html Non-graded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. BBA 2401, Principles of Macroeconomics 2 Chapter 7 ECON4 William A. McEachern Unemployment and Inflation © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Unemployment • Unemployment – Personal cost – Cost on the economy • Measuring unemployment – Civilian non-institutional adult population – Labor force • Employed + Unemployed – Unemployment rate • Percentage of unemployed in the labor force © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Unemployment • Civilian non-institutional adult population – All civilians 16 years of age and older – Except those in prison, in mental facilities, or in homes for the aged • Labor force – Those 16 years of age and older – Working or looking for work • Civilian population – Not in the military © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Unemployment • Adult population – Employed • Working full time or part time – Not working • Unemployed (looking for work) • Not in labor force – Retired; Students; Don’t want to work – Discouraged workers © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Exhibit 1 The Adult Population = the Employed, Unemployed, and Those Not in the Labor Force: 4/2014 (millions) The labor force, depicted by the left circle, consists of those employed plus those unemployed. Those not working, depicted by the right circle, consists of those not in the labor force and those unemployed. The adult population sums the employed, the unemployed, and those not in the labor force. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Unemployment • Unemployment rate – Number unemployed as a percentage of the labor force • Discouraged workers – Drop out of the labor force in frustration because they can’t find work © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Unemployment • Labor force participation rate – Labor force as percentage of adult population • Unemployment over time – Rise during contractions – Fall during expansions – 1980s to 2000: Overall downward trend • Growing economy • Fewer teenagers in workforce © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Unemployment • Unemployment over time – 2000 to 2010: Overall upward trend • Recession of 2001 • Sharper recession of 2008-2009 • Slower job creation • Number of unemployed – 6 million in 2000 – 15 million in 2010 • Unemployment rate – Increased form 4 to 10% © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Exhibit 2 The U.S. Unemployment Rate Since 1900 Since 1900, the unemployment rate has fluctuated widely, rising during contractions and falling during expansions. During the Great Depression of the 1930s, the rate spiked to 25 percent. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Unemployment • Unemployment in various groups – More education • Lower unemployment – Age • Higher unemployment among teenagers – Race and ethnicity • Lower unemployment among white workers – Gender • Lower unemployment rate for women © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Exhibit 3 Unemployment Rates for Various Groups (a) Different groups face different unemployment rates. The unemployment rate is higher for black workers than for white and higher for teenagers than for those 20 and older. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Unemployment • Varies by occupation – Blue-collar workers • Higher unemployment rates – Professional and technical workers • Lower unemployment rates – Construction workers • High unemployment rates at times – Seasonal and subject to wide swings over the business cycle © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Unemployment • Varies across regions – Certain occupations dominate labor markets in certain regions – Even within a state • National unemployment rate – Masks differences across the country – Masks differences across an individual state © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Exhibit 4 Unemployment Rates Differ Across U.S. Metropolitan Areas © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Sources of Unemployment • Frictional unemployment – Bring together employers and job seekers – Doesn’t last long – Better match workers and jobs • Seasonal unemployment – Seasonal changes in labor demand © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Sources of Unemployment • Structural unemployment – Mismatch of skills or geographic location – Occurs because changes in tastes, technology, taxes, and competition • Reduce the demand for certain skills • Increase the demand for other skills • Cyclical unemployment – Increases during recessions – Decreases during expansions © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Sources of Unemployment • Duration of unemployment – April 2012, unemployment rate = 8.1% • Average duration of unemployment = 33 weeks – 18% - unemployed less than 5 weeks – 20% - unemployed 5–14 weeks – 16% - unemployed 15–26 weeks – 46% - unemployed 27 weeks or longer • Long-term unemployed – Those out of work for 27 weeks or longer © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Full Employment • Full employment – No cyclical unemployment – Some unemployment • Frictional • Structural • Seasonal – Estimates: 4-6% © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Unemployment Compensation • Unemployment benefits – Half of the unemployed – Criteria • Lost job and looking for work – Time limit: 6 months • Longer during recessions – 50% of take-home pay – May reduce the incentive to find work © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 International Comparisons • Unemployment trends – US: down – Japan: up • Low unemployment : Job security • Bankruptcy – Western Europe: remained high • Higher unemployment benefits • Last longer • Government regulations © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Exhibit 5 In the Last Quarter Century, U.S. Unemployment Rate Fell, Europe’s Stayed High, Japan’s Rose © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Problems • Official unemployment figures – Understate unemployment • Discouraged workers • Marginally attached to the labor force • Underemployed – Only part-time (want full-time) – Overqualified © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Problems • Official unemployment figures – Overstate unemployment • Looking for work – Only to qualify for unemployment benefits • Only full-time (want part-time) • Underground economy • Official U.S. unemployment figures – Tend to underestimate unemployment © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Inflation • Inflation – Sustained increase in economy’s average price level • Annual inflation rate – Percentage increase in the average price level from one year to the next © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Inflation • Hyperinflation – Extremely high inflation • Deflation – Sustained decrease in price level • Disinflation – Reduction in the rate of inflation © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Two Sources of Inflation • Increase in AD – Demand-pull inflation – Increased government spending – Social programs • Decrease in AS – Cost-push inflation – Increase cost of production • Push up the price level – Stagflation © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Exhibit 6 Inflation Caused by Shifts of Aggregate Demand and Aggregate Supply Curves (a) Demand-pull inflation: inflation caused by an increase of aggregate demand (b) Cost-push inflation: inflation caused by a decrease of aggregate supply Price level Price level AS AD’ P AD AD 0 AS P’ P’ P AS’ Aggregate output 0 Aggregate output Panel (a) illustrates demand-pull inflation. An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’. Panel (b) shows cost-push inflation. A decrease of aggregate supply to AS’ “pushes” the price level up from P to P'. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 A Historical Look • Price level, US, since 1913 – Steady increase • Inflation or deflation, US, since 1913 – Before 1950s • High inflation – war related – Followed by deflation – Since 1950s • Inflation: 3.7% per year © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Exhibit 7 Consumer Price Index Since 1913 (a) Panel (a) shows that, despite fluctuations, the price level, as measured by the consumer price index, was lower in 1940 than in 1920. The price level began rising in the 1940s. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Anticipated vs. Unanticipated • Anticipated inflation – Expected inflation • If inflation > expected – Sellers lose – Buyers gain • If inflation < expected – Sellers gain – Buyers lose © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Inflation • • • • Unpopular Imposes transaction costs Obscures relative price changes Differ across metropolitan areas – Housing prices © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 Exhibit 8 Average Annual Inflation from 2007 to 2011 Differed Across U.S. Metropolitan Areas © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 International Comparisons • First half of 1980s – Declining inflation • Mid-1980s to early 1990s – Rising inflation • Overall trend since 1980s – Lower inflation • 2009 – Price level declined in U.S. and Japan © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Exhibit 9 Inflation Rates in Major Economies Have Trended Lower Over the Past Three Decades © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 Inflation and Interest Rates • Interest – Dollar amount paid by borrowers to lenders • Interest rate – Interest per year – As a percentage of the amount loaned © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35 Inflation and Interest Rates • Supply of loanable funds – Amount of money people are willing to lend – Upward sloping • Demand of loanable funds – Amount of funds demanded by households, firms, and governments – Downward sloping © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 Inflation and Interest Rates • Interest rate – Inversely related with the quantity of loanable funds demanded • Downward-sloping demand curve – Directly related with the quantity of loanable funds supplied • Upward-sloping supply curve © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 Exhibit 10 The Market for Loanable Funds Nominal interest rate S i D 0 Loanable funds per period The upward-sloping supply curve, S, shows that more loanable funds are supplied at higher interest rates. The downward-sloping demand curve, D, shows that the quantity of loanable funds demanded is greater at lower interest rates. The two curves intersect to determine the market interest rate, i. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 Inflation and Interest Rates • Nominal interest rate – Interest rate expressed in dollars of current value • Not adjusted for inflation – Specified on the loan agreement • Real interest rate – Interest rate expressed in dollars of constant purchasing power =Nominal interest rate – Inflation rate © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 Why is Inflation Unpopular? • Pay higher prices – Inflation = Penalty • Receive higher receipts – Higher income • ‘well-deserved’ reward • Fixed nominal income – Unadjusted for inflation • Social Security – Adjusted for inflation (COLA) © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 Chapter 8 ECON4 William A. McEachern Productivity and Growth © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Theory of Productivity and Growth • Increased standard of living – Increase in amount of resources – Increase in quality of resources – Better technology – Improvement in the rules of the game © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Growth and PPF • PPF, production possibilities frontier – Economy’s production – Efficient use of resources – Assumptions • Fixed quantity of resources, technology, and rules of the game • Two categories of products – Consumer goods – Capital goods © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Growth and PPF • PPF: – Inside: Inefficient – Outside: Unattainable – On the PPF: Efficient – Bowed out • Some resources are specialized • Economic growth • Outward shift of PPF © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Growth and PPF • Economic growth – Greater availability of resources – Improvement in the quality of resources – Technological change that makes better use of resources – Improvements in the rules of the game that enhance production © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Exhibit 1 Economic Growth Shown by Shifts Outward of the Production Possibilities Frontier (a) Lower growth (b) Higher growth C’ Consumer goods Consumer goods C’’ C A I I’ Capital goods C B I I’’ Capital goods An economy that produces more capital goods will grow more, as reflected by a shift outward of the production possibilities frontier. More capital goods are produced in panel (b) than in panel (a), so the PPF shifts out more in panel (b). © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 What is Productivity? • Production – Process that transform resources into goods and services • Productivity – Efficient use of resources – Ratio of a specific measure of output to a specific measure of input • Labor productivity – Output per unit of labor © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Labor Productivity • Labor – Most commonly used to measure productivity – 70% of production costs – Easily measured – Available statistics • Labor productivity – Increases with human and physical capital per worker © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Labor Productivity • Poorer countries – Labor is cheap, capital is dear – Producers substitute labor for capital • Economy accumulates more capital per worker – Labor productivity increases – Standard of living grows © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Per-Worker Production Function • Per-worker production function, PF – Relationship between • Capital per worker • Output per worker – Upward sloping - diminishing slope • Diminishing marginal returns from capital – Increased productivity • More capital per worker - move along PF © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Exhibit 2 Output per worker Per-Worker Production Function PF y 0 k Capital per worker The per-worker production function, PF, shows a direct relationship between the amount of capital per worker, k, and the output per worker, y. The bowed shape of PF reflects the law of diminishing marginal returns from capital, which holds that as more capital is added to a given number of workers, output per worker increases but at a diminishing rate and eventually could turn negative. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Technological Change • Technological change – Improves the quality of capital – Increased productivity – Upward rotation of PF – Higher standard of living © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Exhibit 3 Output per worker Impact of a Technological Breakthrough on the Per-Worker Production Function PF’ y’ PF y 0 k Capital per worker A technological breakthrough increases output per worker at each level of capital per worker. Better technology makes workers more productive. This is shown by a rotation upward in the per-worker production function from PF to PF’. An improvement in the rules of the game would have a similar effect. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Rules of the Game • Rules of the game – Formal and informal institutions that promote economic activity • Laws, customs, manners, conventions, other institutions – Stable political climate • Benefit productivity • Upward rotation of PF © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Productivity & Growth in Practice • Industrial market countries – Developed countries – The first to experience long-term economic growth during the 19th century – Highest standard of living • Abundant human and physical capital – 16% of world population – Produce 75% of world’s output © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Productivity & Growth in Practice • Industrial market countries – Economically advanced capitalist countries of • Western Europe, North America, Australia, New Zealand, and Japan – Newly industrialized Asian economies • Taiwan, South Korea, Hong Kong, and Singapore © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Productivity & Growth in Practice • Developing countries – Poor countries – Lower standard of living • Less human and physical capital • Low labor productivity – 84% of world’s population © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Education & Economic Development • Education – Human capital – Higher productivity • Industrial market economies – Higher education levels • Developing countries – Lower education levels © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Exhibit 4 Percent of Adult Population With at Least a PostHigh School Degree: 1998 and 2009 The share of the U.S. population ages 25 to 64 with at least a degree beyond high school increased from 35 percent in 1998 to 41 percent in 2009. The United States slipped from second among major industrial market economies in 1998 to third in 2009. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 US Labor Productivity • Annual productivity growth – 2.1% per year, since 1870 (by 1,735%) – Over long periods • Small differences in productivity make huge differences in standard of living • 1948-1973: Golden days – Productivity growth: 2.9% per year © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 US Labor Productivity • 1974-1982: Slowdown to 1% – Oil pieces jumped (1973-1974, 19791980) • Inflation, stagflation, three recessions – Legislation • Protect the environment • Improve workplace safety • 1983: rebound – Information revolution © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Exhibit 5 Long-Term Trend in U.S. Labor Productivity Growth: Annual Average by Decade Annual productivity growth, measured as the growth in real output per work hour, is averaged by decade. For the entire period since 1870, labor productivity grew an average of 2.1 percent per year. Note the big dip during the Great Depression of the 1930s and the big bounce back during World War II. Productivity growth slowed during the 1970s and 1980s but recovered during the 1990s and 2000s. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Exhibit 6 U.S. Labor Productivity Growth Slowed During 1974 to 1982 and Then Rebounded to 2005, Then Slowed Again The growth in labor productivity declined from an average of 2.9 percent per year between 1948 and 1973 to only 1.0 percent between 1974 and 1982. A jump in the price of oil contributed to three recessions during that stretch, and new environmental and workplace regulations, though necessary and beneficial, slowed down productivity growth temporarily. The information revolution powered by the computer chip and the Internet has boosted productivity in recent years. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Output per Capita • Standard of living – Output per capita – Real GDP divided by population • The U.S. – General upward trend – During recessions • Decrease in productivity © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Exhibit 7 U.S. Real GDP per Capita has Nearly Tripled Since 1962 Despite eight recessions since 1959, real GDP per capita has nearly tripled. Periods of recession are indicated by the pink shaded bars. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 International Comparisons • U.S., level of output per capita – The highest: $46,400 per capita, 2009 – 21% more than Canada • U.S., growth in output per capita – The third: 1.8% per year © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Exhibit 8 U.S. GDP per Capita in 2012 was Highest of Major Economies © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 Exhibit 9 U.S. Real GDP per Capita Outgrew Most Other Major Economies Between 1990 and 2010 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Other Issues • Does technological change lead to unemployment? – Job dislocations, displaced workers – More affordable products, higher demand • Increased employment and production – No statistical evidence © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Research and Development Basic research – General search for knowledge – First step for technological advancement – Yields a higher return to society Applied research – Answer particular questions – Develop specific products ibit 10 R&D Spending as a Percentage of GDP for Major Economies During the 1980s, 1990s, and 2008 Industrial Policy Industrial policy – Government • Use taxes, subsidies, regulations, coordination • Nurture technologies • Protect domestic industries – Concerns • Government’s efficiency • Giveaway programs Do Economies Converge? Convergence theory – Developing countries • Can grow faster than advanced ones • Should eventually close the gap Explanations – Adopt existing technologies – Invest in human resources Do Economies Converge? Evidence – Some poor countries are closing the gap • Hong Kong, Singapore, South Korea, and Taiwan • Adopting the latest technology • Investing in human resources – Others • Slow growth • Lower relative standard of living • Trapped Do Economies Converge? Explanations – High birthrates – Difference in human capital – Unstable economic environment – No institutions – Bad infrastructures – Civil war 
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