Firms in Our Macroeconomy

Jamnfl

Arnold_Econ13e_Ch171.pptx

Home >Business & Finance homework help >Economics homework help >Firms in Our Macroeconomy

ECONOMIC GROWTH: RESOURCES, TECHNOLOGY, IDEAS, AND INSTITUTIONS

CHAPTER

©Sashkin/Shutterstock

ECONOMICS

Roger A. Arnold • Thirteenth Edition

17-1 A Few Basics About Economic Growth

17-2 A Production Function and Economic Growth

17-1 A Few Basics About Economic Growth (1 of 1)

Absolute Real Economic Growth: An increase in Real GDP from one period to the next

Per-Capita Real Economic Growth: An increase from one period to the next in per-capital Real GDP, which is Real GDP divided by population

17-1a Do Economic Growth Rates Matter?

If a country’s growth rate is 5%/yr, its Real GDP will double in 14 years

If a country’s growth rate is 2%/yr, its Real GDP will double in 35 years

To calculate the time required for any variable to double, divide its percentage growth rate into 70; (the rule of 70)

Absolute Real Economic Growth Rates for the United States, 2006-2016

EXHIBIT 1

17-2 A Production Function and Economic Growth (1 of 8)

Production Function: A function that specifies the relation between technology and the quantity of factor inputs to output, or Real GDP

17-2a The Graphical Representation of the Production Function

Exhibit 2(a) represents the production function graphically; changes in the inputs are shown in panels 2(b), (c), and (d)

17-2b From the Production Function to the LRAS Curve

The change in and movements along the production function can be linked to shifts in the LRAS curve (Exhibit 3)

The Production Function (1 of 2)

EXHIBIT 2

The Production Function (2 of 2)

EXHIBIT 2

The Production Function and the LRAS Curve (1 of 2)

EXHIBIT 3

The Production Function and the LRAS Curve (2 of 2)

EXHIBIT 3

17-2 A Production Function and Economic Growth (2 of 8)

17-2c Emphasis on Labor

Exhibit 3 show that a rise in labor would lead to a rightward shift in the LRAS curve; a rise in labor would result in economic growth

Then what, in turn, might lead to a rise in labor? If X and Y lead to a rise in labor, then X and Y are factors that promote economic growth

One such factor is taxes; some economists propose promoting economic growth by cutting taxes on activities like working (Exhibit 4)

Lower income taxes shift the labor supply to the right, raising the equilibrium quantity of labor, which produces more Real GDP, or shifts the LRAS curve to the right: economic growth

The Labor Market, the Production Function, and the LRAS Curve (1 of 2)

EXHIBIT 4

The Labor Market, the Production Function, and the LRAS Curve (2 of 2)

EXHIBIT 4

17-2 A Production Function and Economic Growth (3 of 8)

17-2d Emphasis on Capital

As taxes decline on the returns from capital, more capital is utilized in the production process, shifting the production function upward and thereby shifting the LRAS curve to the right

A decline in interest rates prompts firms to borrow more; firms use the borrowed funds to purchase capital goods; the production function shifts upward and the LRAS curve shifts rightward

17-2e Emphasis on Other Resources: Natural Resources and Human Capital

Human Capital: The knowledge and skills a person acquires through education, training, and experience

17-2 A Production Function and Economic Growth (4 of 8)

17-2f Emphasis on the Technology Coefficient and Ideas

Beginning in the 1980s, economists began discussing a new growth theory, placing more attention on technology, ideas, institutions and education

Neoclassical growth theory, which preceded it, emphasized two resources: labor and physical capital; technology was said to be exogenous

New growth theory holds that technology is endogenous, a central part of the economic system; the amount and quality of technology that is developed depends on the amount of resources devoted to it

Also emphasis is on ideas rather than on objects

17-2 A Production Function and Economic Growth (5 of 8

17-2g Discovery and Ideas

One way to promote the discovery process is for business firms not to get locked into doing things in one way only; they must let their employees, all of them, try new ways of getting the job done

The discovery process is seen in the amount of time and effort firms devote to discovery in contrast to the time they devote to actual manufacturing

17-2h Expanding our Horizons

We should think of ways to make the process of discovering ideas, experimenting with different ways of doing things and developing new technology more likely

17-2 A Production Function and Economic Growth (6 of 8)

17-2i Institutions Matter

Institution: The rules of the game in a society, or more formally, the humanly devised constraints that shape human interaction; the rules and regulations, laws, customs, and business practices of a country

Economists argue that some environments are more conducive to economic growth than others; here are a few institutions that most economists agree are conducive to economic growth:

Property rights structure

The legal system

Growth-promoting policies vs. Transfer-promoting policies

Other institutions

17-2 A Production Function and Economic Growth (7of 8)

17-2i Institutions Matter (cont)

Property Rights Structure

Ownership of private property is an incentive to produce goods and services; protection of private property rights is also a greater incentive to produce goods and services

The Legal System

Individuals are more likely to start businesses in a country with a legal system which is dependable, honest and dedicated to enforcing legitimate contracts and protecting private property

17-2 A Production Function and Economic Growth (8 of 8)

17-2i Institutions Matter (cont)

Growth-Promoting Policies vs. Transfer-Promoting Policies

A growth-promoting policy increases Real GDP and enlarges the size of the economic pie; a transfer-promoting policy leaves the size of the pie unchanged, but increases the size of the slice that one group gets relative to another

Other Institutions

Also conducive to economic growth: open and competitive markets, free (international) trade, policies that promote economic freedom, a stable monetary system, taxes and regulations that are not burdensome, and a strong and effective educational system