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Lecture Economics (9/e): Chapter 27 - David C. Colander

Chapter 27 - The classical long-run policy model: Growth and supply-side policies. After reading this chapter, you should be able to: Define growth, list its benefits and costs, and relate it to living standards; discuss the relationship among markets, specialization, and growth; list five important sources of growth. | Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. — Joseph Schumpeter The Classical Long-Run Policy Model: Growth and Supply-Side Policies Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Define growth, list its benefits and costs, and relate it to living standards Discuss the relationship among markets, specialization, and growth List five important sources of growth Explain how the sources of growth can be turned into growth 2 Growth and the Economy’s Potential Output Growth is an increase in potential output Potential output is the highest amount of output an economy can produce from existing production processes and resources Productivity is output per unit of input The long-run growth focus is on how to increase potential output Say’s Law is that supply creates its own demand The short-run focus is on how to get the economy operating at its potential 3 Importance of Growth for Living Standards Growth in income improves average living standards Because of compounding, long-term growth rates can make huge differences The rule of 72 states: The # of years to double income = 72/growth rate If China’s per capita income of $8,500 grows 8% per year and the U.S. per capita income of $50,000 grows 1% per year: Within 27 years per capita income in China will surpass that in the U.S. and after 9 more years will be significantly higher 4 Markets, Specialization, and Growth Markets, specialization, and the division of labor increase productivity and growth Specialization is the concentration of individuals on certain aspects of production Division of labor is the splitting up of a task to allow for specialization of production Markets may seem unfair because of the effect that they have on the distribution of income Even though | Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. — Joseph Schumpeter The Classical Long-Run Policy Model: Growth and Supply-Side Policies Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Define growth, list its benefits and costs, and relate it to living standards Discuss the relationship among markets, specialization, and growth List five important sources of growth Explain how the sources of growth can be turned into growth 2 Growth and the Economy’s Potential Output Growth is an increase in potential output Potential output is the highest amount of output an economy can produce from existing production processes and resources Productivity is output per unit of input The long-run growth focus is on how to increase potential output Say’s