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Supply-siders can come from any political party, but different groups tend to favor speci c policies (i.e., tax cuts or increased education).
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Example 9.1 In Figure 9-1, assume that the labor supply and population are unchanged and that a combination of tax incentives and a better-educated population shift the aggregate supply curve AS1 to AS2. An increase in the money supply shifts aggregate demand from AD1 to AD2; the price level remains constant and output increases from y1 to y2. Since there is no change in population, output per capita has increased with an attending rise in the economy s standard of living.
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CHAPTER 9: Economic Growth and Productivity
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Figure 9-1
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1. An economy s standard of living is rising when real GDP is increasing 10 percent while population is increasing 5 percent. 2. Assuming full employment of resources, an increase in the labor force, ceteris paribus, always increases output per capita. 3. Additions to the economy s stock of capital always result in capital deepening and capital widening. 4. Supply-side policies intend to increase the economy s ability to produce. 5. The slowdown in U.S. productivity growth was caused by capital widening. Answers: 1. True; 2. False; 3. False; 4. True; 5. False
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Solved Problem 9.1 Table 9.1 presents growth in real GDP for Country A and Country B. For each country nd: a. Relative increase in output between 1984 and 1994. b. Output per capita for 1984 and 1994.
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86 PRINCIPLES OF ECONOMICS
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Table 9.1
c. Relative increase in output per capita between 1984 and 1994. d. Which measure of economic growth, as calculated in a. or c., is more useful Solution: a. The relative increase in output is found by dividing 1994 GDP by that for 1984. The relative increase in Country A s real GDP is 2.0; thus, Country A s real GDP doubled between 1984 and 1994. The relative increase for Country B is 2.45 for the same period. b. An economy s per capita GDP is found by dividing real GDP by the economy s population. In Country A, per capita output is $3,915.66 in 1984 and $5,803.57 in 1994. Country B s per capita output increased from $3,915.66 in 1984 to $4,796.67 in 1994. c. The relative increase in per capita output between 1984 and 1994 is found by dividing per capita output in 1994 by that in 1984. The relative increase in per capita output is 1.48 for Country A and 1.22 for Country B. d. Economic growth is frequently presented as the increase in real GDP. While useful for some analysis, increases in real GDP do not measure the economic well-being of individuals in an economy, which is best measured by increases in per capita output. The calculations in parts a. and c. show how one might reach different conclusions about an economy s economic growth. Country B s real GDP more than doubled between 1984 and 1994, while A s only doubled; B obviously has increased its output at a faster rate than A. On a per capita basis, however, output per capita increased more rapidly in Country A than B. Which measure is more useful depends upon one s intent in measuring growth. When one is only interested in the increase in aggregate output, growth in real GDP
CHAPTER 9: Economic Growth and Productivity
is the relevant measure. However, when the focus is upon the standard of living in the economy, output per capita is the better measure of economic growth. Solved Problem 9.2 What objections, if any, are there to economic growth Solution: Some economists object to maximizing economic growth because in doing so it may possibly affect the quality of life, in such ways as pollution of the environment or waste of natural resources. Maximized economic growth may also fail to resolve socioeconomic problems or may exacerbate them. Rapid economic growth through technological change in many instances increases worker obsolescence (workers no longer have skills needed in the labor market), brings about new anxieties and insecurities, and undermines family relationships as the workplace takes on greater importance than human relationships. Although attempts are being made to curb pollution, industrial waste is a by-product of increased output. It therefore can be expected that water, land, and air pollution will increase with time. Waste of economic resources may also result when least-cost methods dictate current resource use with little attention paid to the possible effect that current use may have upon future generations. And there is no guarantee that growth resolves socioeconomic problems such as poverty. Poverty in an economy is relative to the economy s standard of living. Thus, growth does not resolve the problem of relative poverty, which is only resolved by a redistribution of current income.
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