ENGR 3360U Winter 2014

Unit 2.2.4
Macroeconomics
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 2.2 Macroeconomics

Change Record
2014-I-01 Initial Creation

2.2-2

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

2.2.4 Economic Growth

2.2.4.1 The Rise in Real GDP/capita
2.2.4.2 Why are some Nations Rich; others not?
2.2.4.3 Determinants of Average Labour
Productivity
2.2.4.4 Current Situation
2.2.4.5 Promoting Economic Growth
2.2.4.6 Limits to Growth
2.2-3

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Rising Living Standards

A continuing increase in average labour
productivity is key to rising living standards
Productivity depends on:
Equipment available to workers (Fixed Capital)
Skills workers bring to their jobs (Human
Capital)
Transportation and communications
infrastructure (Public Capital)
Legal and social environment (Social Capital)
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

2.2.4.1 Growth Rates and Productivity

How long-run growth can revolutionize
living standards!

2.2-5

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Real GDP per Person in Selected Countries, 1870-2000 (in

1995 U.S. Dollars)

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Real GDP per Person in Five Industrialized

Countries, 1870-1998

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

The BIG news of the 21st Century the

rise of China and India !
Chinas GDP has grown by 8 10%
annually since the early 1980s
1980 per capita GDP = $ 708
2003 per capita GDP = $ 4,304
Chinas growth shows little sign of slowing

1995 -2003 per capita GDP in China grew by

7.55%

In recent years, India has grown at a

similarly high rate
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

China & India Real GDP Per Capita 19752003

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Small Differences Add up - Eventually

Small differences in annual growth rates
can have large long-run effects
Year after year compound growth

Compound interest is
The payment of interest not only on the original
deposit but on all previously accumulated
interest

Compound growth works the same way

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

The role of Average Labour Productivity

Real GDP (Y) per person is the product of
average output of those employed,
percentage of those employed in the population. Let

Y = total real output

N = number of employed workers
POP = total population
Then,

GDPpc = Y/POP
GDPwrk = Y/N
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Real GDP Per Person and Growth

Real GDP per person can grow only to the
extent that growth occurs in
Worker productivity (Output per hour worked)
Average working hours per worker
The fraction of the population employed

In the long run

The important factor has been increases in
average labour productivity
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Real GDP per Person and Average Labour

Productivity in Canada, 1960-2003

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Percentage of the Canadian Population

in Paid Employment, 1960-2003

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

More Consumption or more Leisure ?

Higher Labour Productivity means:
more output could be produced with the same amount
of labour OR
the same output could be produced with less labour

Among rich countries there is a divergence in

trends
USA increasingly work & consumption oriented
Europe - less working time

2.2-15

vacations, holidays & earlier retirement

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Annual Number of Hours Worked per Person 15-64

Annual Number of Hours Worked per Person
Aged 15-64

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

2.2.4.3 Determinants of Average Labour

Productivity
2.2.4.1 Human capital
2.2.4.2 Physical capital
2.2.4.3 Land and natural resources
2.2.4.4 Technology
2.2.4.5 Leadership
2.2.4.6 Legal and political environment

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Human Capital
Similar to physical capital in that it is acquired through the investment of
time and/or money
Costs of Human Capital
Opportunity cost of student time = foregone wages
E.g. - going to school to learn new skills
Teacher salaries and school infrastructure
Greater human capital results in higher potential productivity
But slow growth of macro economy can mean labour force is
unemployed or underemployed if so, then
Actual output < potential output
Human capital depreciates if not used skills can become rusty
if workers are unemployed for long

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Physical Capital
Physical capital: Tools people have to work with (e.g., machines,
factories)
Long term trend is to substitute machine labor for human labor with
more and better physical capital, workers produce more
Diminishing returns to capital
If technology and other inputs are held constant, an additional unit
of capital typically does not add as much to production as the first
few units
Increasing the amount of capital
Will tend to increase the productivity of the workforce
Each worker has More tools to work with
But the Productivity benefits to adding more capital decline as more
capital is added. Diminishing returns to additional capital

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Average Labour Productivity and Capital

per Worker in 15 Countries, 1990

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Other Resources
Land, energy, and raw materials
Fertile land
Historically, land fertility was the key issue when society was
primarily agricultural
But agriculture is now less than 3% of labour force
Resource Rents
= the surplus of resource revenues over the cost of extraction
Resource rents can provide funds for investment in physical or human
capital or can be wasted
E.g. Alberta, Norway, Nigeria & Iraq have all received substantial
revenues from oil production
But Nigeria and Iraq are worse off now than in 1980
Social & Political factors determine if society as whole benefits

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Technology
Ability to develop and apply new, more productive technologies will
increase productivity
Examples:
Steam engine (since late 1700s)
Internal combustion engine (since late 1800s)
Computers (since approximately 1960)
New technologies improve productivity throughout economy - not just
where introduced
Single most important source of productivity improvement

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Entrepreneurship
Behaviour that results in new products, services, technological
processes, or organizational innovations. Examples:
Henry Fords mass production
Japan - just-in-time inventory system
Entrepreneurship can occur in the
For-profit sector
Not-for-profit sector
Government sector
But Scam artists and fraudsters can also be very innovative, so..

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Limits to Growth?
Can economic growth continue indefinitely given that we have a finite world
of natural resources?
Note: increases in GDP do not necessarily mean increased demand for
resources
Examples:
Services (e.g. massage therapy) are part of GDP, but may not use
material resources and may increase over time
Technical change may reduce environmental impact
compare the resources used in storing music on LPs or an
IPod !!
Some problems created by economic growth are a particular challenge for
current institutions:
Global warming is classic example because each nation would like
others to bear the cost

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.2 Macroeconomics

Does Growth help or hurt the Environment ?

Greater wealth expands societys capacity to protect the environment
Worst environmental problems are found in very poor nations
too poor to afford remedies
Some rich nations (e.g. Europe) have made major efforts to reduce
environmental load BUT
Its a political choice e.g. USA + Canada resist Kyoto
Pessimistic view of economic growth often ignores market responses
Higher prices reduce quantity demanded, and people tend to seek
out substitutes

2.2-25

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco