Econ 102 Discussion Section 5 (Chapter 11 and 9.1) Long Run Economic Growth, Productivity, and the Aggregate Production Function Sustained economic growth only occurs when the amount of output per worker, called labor productivity, increases steadily over time. There are two primary factors determine labor productivity: 1. The quantity of capital per hour worked 2. The level of technology As a result, economists often focus on changes in these two variables over time when discussing long run economic growth. Technological change refers to a change in the output possible given a set number of inputs, and can be accomplished via three channels: 1. Better machinery and equipment 2. Increases in human capital: human capital refers to the knowledge and skills that workers obtain from education, training, or life experiences 3. Better means of organizing and managing production These ideas are best seen in the aggregate production function, which shows how productivity depends on the quantities of capital per worker. In drawing the production function, we place real GDP per hour worked (Y/L) on the y-axis, and capital per hour worked (K/L) on the x-axis. Physical capital is typically denoted with the variable K, while human capital (or labor) is denoted with the variable L. There are several features worth noting on the aggregate production function. First, for any given production function, we assume that the level of technology is fixed. There are two implications: - If the level of capital per worker changes, this is a movement along the production function If the level of technology changes, it is a shift of the production function Second, notice the shape of the production function. Typically, production functions are concave, meaning that their slopes decrease as you increase the variable on the x-axis. In economics, we say this is due to the law of diminishing returns. This law states that when you increase one input (capital per hour worked above), while holding the other input fixed (level of technology), those increases yield smaller gains in terms of real GDP. Four Factors That Affects the Economic Growth in Low-Income Countries - Failure to enforce the rule of law Wars and revolutions Poor public education and health services Low rates of saving and investment The Unemployment Rate In order to calculate the unemployment rate, we must first define some terms regarding how we think about employment and unemployment. Employment is the total number of people currently employed, either full time or part time Unemployment is the total number of people who are actively looking for work but aren’t currently employed From here, we can define the labor force (working-age population), labor force participation rate, and unemployment rate mathematically 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 = 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 ×100 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑎𝑔𝑒 16 𝑎𝑛𝑑 𝑜𝑙𝑑𝑒𝑟 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 ×100 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 Discouraged workers are non-working people who are capable of work but have given up looking for work given the state of the job market. They are not included in the labor force and thus aren’t included in the calculation of the unemployment rate. This causes the unemployment rate to underreport the number of people who are unable to find work in the economy. Practice Problems 1. Suppose that the capital per worker doubles in the United States from 1980 to 2000. How would this be represented on the per-worker production function? a) Movement to the right on the production function b) Movement to the left on the production function c) The production function shifts up d) The production function shifts down 2. Which of the following would likely cause the per-worker production function to shift up? a) Natural disasters on the east coast destroying factories in all coastal states b) Increase in the number of copiers each white collar worker has access to c) Congress passes a law increasing the amount of scholarships available for adults to return to college to finish their degrees d) b and c Table 1. Working-Age Population Employed Unemployed Country A 1,000,000 600,000 60,000 Country B 2,000,000 1,300,000 200,000 3. Refer to Table 1. What is the labor force participation rate in Country A? a) 6% b) 60% c) 66% d) 100% 4. Refer to Table 1. What is the unemployment rate in Country B? a) 10.0% b) 13.3% c) 15.4% d) 20.0% 5. Which person is a discouraged worker? a) A person who doesn’t have the correct skills to find a job b) A person in the process of looking for a job c) A person who stopped looking for a job out of frustration d) A person working part time who wants to work full time 6. The presence of discouraged workers causes: a) The actual unemployment rate to understate the true level of unemployment b) The actual unemployment rate to overstate the true level of unemployment c) The actual unemployment rate to be equal to the true level of unemployment d) The natural rate of unemployment to increase