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Capital Deepening and Technological Capital Deepening and Technological ProgressProgressCapital Deepening and Technological Capital Deepening and Technological ProgressProgress
There are two basic mechanisms which increase GDP per capita over the long term:
Capital Deepening and Technological Capital Deepening and Technological ProgressProgressCapital Deepening and Technological Capital Deepening and Technological ProgressProgress Capital deepening refers to an
increase in the economy’s stock of capital—plant and equipment—relative to its workforce (capital per worker)
Technological progress is the ability to produce more output without using any more inputs—capital or labor
The Diversity of Economic ExperienceThe Diversity of Economic ExperienceThe Diversity of Economic ExperienceThe Diversity of Economic Experience
Making comparisons of real GDP across countries is difficult. Each country has its own currency and its own price system.
It is difficult, therefore, to calculate the true variations in the cost of living across countries.
It takes a large team of economists to collect data on prices, identify identical quality products, and express the GDP of each country in U.S. prices.
Growth Rates & Patterns of GrowthGrowth Rates & Patterns of GrowthGrowth Rates & Patterns of GrowthGrowth Rates & Patterns of Growth
One question economists ask is whether poorer countries can close the gap between their level of GDP per capita and the GDP per capita of richer countries.
Closing the gap is called convergence. To converge, poorer countries have to grow at more rapid rates than richer countries are growing.
Capital DeepeningCapital DeepeningCapital DeepeningCapital Deepening
The stock of capital increases with any gross investment spending but decreases with any depreciation.
It follows that in order for the stock of capital to increase, gross investment must exceed depreciation.
However, as capital grows, depreciation also grows, eventually catching up to the level of gross investment, and putting a stop to the growth of capital deepening.
Population Growth, Government, & Population Growth, Government, & TradeTradePopulation Growth, Government, & Population Growth, Government, & TradeTrade Population growth, which increases the size
of the labor force, will cause the capital per worker ratio to decrease. With less capital per worker, output per worker will also be less. This concept reflects the principle of diminishing returns.
PRINCIPLE of Diminishing ReturnsSuppose that output is produced with two or more inputs and that we increase one input while holding the other inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.
Population Growth, Government, & Population Growth, Government, & TradeTradePopulation Growth, Government, & Population Growth, Government, & TradeTrade
As the government drains savings from the private sector, the amount of total investment decreases, and there is less capital deepening.
This occurs when the government uses the taxes collected from the private sector to engage in consumption spending, not investment.
Assuming that households save a fixed fraction of their income, an increase in taxes will cause savings—the amount of money that would have been available for investment—to fall.
Population Growth, Government, and Population Growth, Government, and TradeTradePopulation Growth, Government, and Population Growth, Government, and TradeTrade
The foreign sector can also play a role in capital deepening.
An economy can run a trade deficit and import investment goods to aid capital deepening.
The economy can finance the purchase of those goods by borrowing and, as investment raises, GDP and economic wealth rises, and the country can afford to pay back the borrowed funds.
If the government taxes the private sector to increase investment—for example, to build valuable infrastructure such as roads, buildings, and airports, it is promoting capital deepening.
There are natural limits to capital deepening. Capital is subject to diminishing returns just as labor.
Population Growth, Government, and Population Growth, Government, and TradeTradePopulation Growth, Government, and Population Growth, Government, and TradeTrade
The Key Role of Technological ProgressThe Key Role of Technological ProgressThe Key Role of Technological ProgressThe Key Role of Technological Progress
Technological progress is the ability of an economy to produce more output without using any more inputs.
With higher output per person, we enjoy a higher standard of living.
Technological progress, or the birth of new ideas, is what makes us more productive. Per- capita output will rise when we discover new and more effective uses of capital and labor.
Robert Solow, a Nobel laureate in economics from MIT, developed a method for determining the contributions to economic growth from increased capital, labor, and technological progress, called growth accounting.
Technological progress is difficult to measure, but if we know how much are the contributions of capital and labor to economic growth, the remaining growth which we cannot explain must have been caused by increases in technological progress.
Sources of U.S. Real GDP Growth, Sources of U.S. Real GDP Growth, 1929-1982 1929-1982 (average annual percentage (average annual percentage rates)rates)
Sources of U.S. Real GDP Growth, Sources of U.S. Real GDP Growth, 1929-1982 1929-1982 (average annual percentage (average annual percentage rates)rates)
Growth Accounting: Three ExamplesGrowth Accounting: Three ExamplesGrowth Accounting: Three ExamplesGrowth Accounting: Three Examples
From 1980 to 1985, the economies of Hong Kong and Singapore both grew at impressive rates of about 6%, yet the causes and results of growth in each country were very different.
Productivity growth was extremely high during the 1960s. It slowed down a bit in the late 1960s and then slowed dramatically after the oil shocks in the 1970s.
In recent years there has been a resurgence in productivity growth, which reached 2.5% from 1994-2000.
The slowdown in productivity growth also meant slower growth in real wages since 1973.
Employees received lower wages but higher benefits, but the rate of growth of total compensation was less than the growth rate of real hourly earnings in the pre-1973 period.
Real Hourly Earnings and Total CompensationReal Hourly Earnings and Total CompensationReal Hourly Earnings and Total CompensationReal Hourly Earnings and Total Compensation
The slowdown in labor productivity, in the United States and abroad, cannot be explained by reduced rates of capital deepening or changes in the quality and experience of the labor force.
The failure of productivity growth to increase despite rapid investment in new technology is a mystery that has baffled many economists.