Economic Growth and Rising Living Standards

1. Economic Growth and Rising Living Standards

2. Economic Growth and Rising Living Standards • Economist Thomas Malthus, writing in 1798, came to a striking conclusion • “Population, when unchecked, goes on doubling itself every twenty-five years, or increases in a geometrical ratio…The means of subsistence…could not possibly be made to increase faster than in an arithmetic ratio” • Prognosis was so pessimistic that it led Thomas Carlyle, one of Malthus’s contemporaries, to label economics “the dismal science” • History has proven Malthus wrong…at least in part • Economists today are optimistic about industrialized nations’ long-run material prospects • Achieving a higher rate of growth in long-run generally requires some sacrifice in short-run

3. The Importance of Growth • Sebab apa kita menitikberatkan pertumbuhan ekonomi Why should we be concerned about economic growth? • Apabila output bertambah lebih cepat drp populasi , KDNk per kapta akan meningkat When output grows faster than population, GDP per capita will rise • Apabila output bertambah perlahan, taraf hidp purata akan jatuh • When output grows more slowly than population, average standard of living will fall

4. Mengukur taraf hidup berdasarkan KDNK per kapita mempunyai batasan • Measuring standard of living by GDP per capita may seem limiting • Tetapi banyak aspek kualiti hidup diambilkira dalam mengira KDNK • Still, many aspects of our quality of life are counted in GDP such as • Food, housing, medical care, education, transportation services, and movies and video games

5. The Importance of Growth • Pertumbuhan ekonomi adlah penting kpd negara-negara di mana tingkat pendapatan adalah kurang drp negara-negara seperti Eropah, Japan dan USA • Economic growth is especially important in countries with income levels far below those of Europe, Japan, and United States • Other than emigration, economic growth is their only hope • Negara-negara yg kaya meletakkan pertumbuhan ekonomi senagai prioriti utama • Growth is a high priority in prosperous nations, too • When output per capita is growing, it’s at least possible for everyone to enjoy an increase in material well-being without having to cut back

6. The Importance of Growth • When output per capita stagnates, material gains become a fight over a fixed pie • The more purchasing power my neighbor has, the less is left for me • In 1950s and 1960s, economic growth in wealthier nations seemed to be taking care of itself • All of that changed starting in 1970s • Economic growth became a national and international preoccupation • Over most of postwar period, output in more prosperous industrialized countries grew by 2 or 3% per year • Beginning in mid-1970s, all of these nations saw their growth rates slip • In late 1990s and early 2000s, only United States and United Kingdom returned to their previous high rates of growth • Other industrialized countries continued to grow more slowly than their historical averages • Seemingly small differences in growth rates matter a great deal

7. What Makes Economies Grow? • Cara yg baik untuk melihat pertumbuhan ekonomiUseful way to start thinking about long-run growth • Lihat kpd apa yg menentukan KDNK potensi untuk sesuatu jangka masa Look at what determines our potential GDP in any given period • KDNK benar bergnatung kpd Real GDP depends on • Kuantiti output yg pekerja boleh hasikan dalam sejam Amount of output average worker can produce in an hour • Jumlah jam yg pekerja habiskan di tempat kerja • Number of hours average worker spends at the job • Nisbah polulasi yg ingin bekerja • Fraction of population that wants to work • Siz polulasi( Size of population)

8. Kuantiti output yg pekerja hasilakan dalam sejam dipanggil produktiviti buruh • Amount of output the average worker produces in an hour is called labor productivity, or productivity • Diukur dengan membahagikan jumlah output (KDNK benar ) dengan jumlah bilangan jam yg tiap-tiap seorang bekerja dalam jangka masa memhghasilkan output • Measured by taking total output (real GDP) of economy over a period of time and dividing by total number of hours that everyone worked during the period to produce that output • Produktiviti = output/jam = Jumlah output / Jumlah jam bekerja • Productivity = Output per hour = Total output ÷ Total hours worked

9. What Makes Economies Grow? • Bilangan jam tiap-tiap pekerja diperolehi dengan membahagikan jumlah jam bekerja dengan junlah tenaga kerja, iaitu , bilangan mereka yang berkerja dalam jangka masaHours of the average worker can be found by dividing total hours worked over a period by total employment, number of people who worked during the period • Purata jam bekerja = Jumlah jam bekerja/ guna tenaga • Average Hours = Total hours worked ÷ Labor Force

10. Nisbah populasi yg bekerja adalah kadar penglibatan tenaga buruh • Fraction of population working is labor force participation rate (LFPR) • Found by dividing labor force (all those who want to work) by population • Kadar penglibatan tenaga buruh = Guna tenaga / populasi • LFPR = Labor Force ÷ Population

11. What Makes Economies Grow? • Multiply these variables together • Total output = Total output ÷ Total hours worked x Total hours worked ÷ Labor Force x Labor Force ÷ Population x Population • Can write equation for total output as • Total output = Productivity x Average Hours x LFPR x Population • Over long-run, when total output tracks closely with potential output, this will give us an equation for potential output

12. What Makes Economies Grow? • Mathematics states that if two variables A and B are multiplied together • Percentage change in their product is approximately equal to sum of their percentage changes • % Δ (A x B) ≈ % ΔA + % ΔB • Applying this rule to all four variables in right side of our equation, as well as to total output on left • Find that growth rate of output (% Δ Total Output) over any period of time is • % Δ Total Output ≈ % Δ productivity + % Δ average hours + % Δ LFPR + % Δ Population

13. Economic Growth and Living Standards • Pada akhirnya , pertumbuhan output potensi tidak akan membawa kpd kenaikan taraf hidup • Ultimately, growth in potential output does not by itself account for a rise in living standards • Apa yg penting untuk taraf hidup meningkat ialah KDNK benar per kapita - yg pada masa panjang akan menyamai output potensi dibahagikan dengan populasi • What matters for a rising standard of living is real GDP per capita • Which—over long-run—will equal our potential output divided by population

14. Economic Growth and Living Standards • Total output = Productivity x Average Hours x LFPR x Population • If we divide both sides by the population, we get • Total output ÷ Population = Productivity x Average Hours x LFPR • In terms of percentage growth rates • % Δ Output per person ≈ % Δ Productivity + % Δ Average hours + % Δ LFPR

15. Economic Growth and Living Standards • Perhatikan bahawa populasi tidak menjadi penting dalam persamaan • Notice that population drops out of the equation • Cara untuk menaikkan taraf hidup ialah dengan menambahkan produktiviti, purata jam bekerja, atau LFPR • Only way to raise living standards is to increase productivity, average hours, or labor force participation rate

16. Economic Growth and Living Standards • Sekiranya output tiap2 orang bertambah disebabkan oleh pertambahan purata jam bekerja , tidak dapat dipastikan bahawa taraf hidup akan naik • If output per person grew due to growth in average work hours, it’s not clear that living standard would increase • D negara maju, purata jam bekerja semakin berkuang dan tidak bertambah • In most developed countries, average hours are slowly decreasing, not increasing • Jadi, dalam simplifikasi kita ketepikan perubahan pada purata jam bekerja dalam persamaan pertumbuhan • So our last simplification is to ignore changes in average hours in growth equation • % Δ Output per person ≈ % Δ productivity + % Δ LFPR

17. Economic Growth and Living Standards • Untuk menerangkan kenapa negara maju masih menikmati peningkatan taraf hidup untuk jangka masa yang lama – • To explain why U.S.—or any developed country—has enjoyed continual rises in living standards over long periods of time • Mesti meneliti pertumbuhan produktiviti dan pertambahan kadar penglibatkan tenaga buruh • Must look to growth in productivity and growth in labor force participation rate

18. Growth in the Labor Force Participation Rate (LFPR) • Dengan populasi yg konstant, mana-mana polisi yg menambahkan bilangan pekerja dalam ekonomi secara definasi akan menambahkan LFPR • With a constant population, any policy that increases total number of workers in economy will, by definition, increase labor force participation rate • 50 tahun yg lalu keluk penawaran buruh telah berpindah ke kanan dan keluk permintaan ke kanan • Over past 50 years, as labor supply curve has shifted rightward, labor demand curve has shifted rightward as well • Sebab apa • Why?

19. Perubahan-perubahan telah menambahkan output yg dihasilkan oleh seorang pekerja untuk sesuatu jangka masa Jadi firma ingin mengambil lebih pekerja pada mana-mana kadar upah • Changes have increased amount of output a worker can produce in any given period • So firms have wanted to hire more of them at any wage • Di sepanjang abad yang lalu, pertambhan permintaan untuk buruh telah melebehi penawaran buruh. Jadi kadar upah purata telah bertambah dan guna tenaga buruh telah juga bertambah • Over past century, increases in labor demand have outpaced increases in labor supply • So that, on balance, average wage has risen and employment has increased

20. Growth in the Labor Force Participation Rate (LFPR) • Impact of these changes on total employment has been dramatic • Currently, U.S. Bureau of Labor Statistics predicts employment growth of 1% per year until 2010—about the same as growth rate of population • Is there anything we can do to make it grow over the next several years, and thus increase our rate of economic growth? • Yes • But, keep in mind that these measures to increase employment would also have costs • Costs that Americans may or may not be willing to pay

21. At point A, labor supply and demand determine an employment level of 100 million workers. Real Hourly Wage An increase in labor supply raises employment to 120 million (at point B) although with a lower wage rate. Millions of Workers Real Output With more people working, real GDP rises from $7 trillion to $8 trillion. Millions of Workers Figure 1: An Increase in Labor Supply A $15 B 12 LD 100 120 B $8 trillion $7 trillion A 120 100

22. Real Hourly Wage If firms demand more labor, employment will increase–from 100 million to 120 million–while the wage rate rises. Millions of Workers Figure 2: An Increase in Labor Demand LS B $17 15 A 100 120

23. Real Hourly Wage Millions of Workers Figure 3: The U.S. Labor Market Over A Century W2 B W1 A L1 L2

24. How To Increase Employment and the LFPR • Salah satu polisi menambhkan guna tenaga ialah dengan mengubah penawaran buruhOne set of policies to increase employment focuses on changing labor supply • Conthnya seperti memgurangkan kadar cukaiAn often-proposed example of this type of policy is a decrease in income tax rates • When we extend your reaction to population as a whole • Pengurangan kadar cukai boleh mengalakan lebih ramai oarang mencari kerja pada kadar upah yg diberikanCan see that a cut in income tax rate can convince more people to seek jobs at any given wage • Memindahkan keluk penawaran buruh ke kanan Shifting labor supply curve rightward

25. How To Increase Employment and the LFPR • In addition to tax rate changes, some economists have advocated changes in government transfer programs to speed growth in employment • Redesigning these programs might stimulate growth in labor supply

26. How To Increase Employment and the LFPR • A cut in tax rates increases reward for working • While a cut in benefits to the needy increases hardship of not working • Either policy can cause a greater rightward shift in the economy’s labor supply curve than would otherwise occur and create growth in labor force participation and output

27. How To Increase Employment and the LFPR • Polisi-polisi kerajaan boleh mempengaruhi keluk permintaan untuk buruh Government policies can also affect labor demand curve • Polisi-polisi kerajaan yg membantu menambahkan kemahiran buruh dan yang membantu guna tenaga dari segi memberikan subsidi secara langsung menyebabkan keluk permintaan buruh pindah ke kanan Government policies that help increase skills of the workforce or that subsidize employment more directly shift the economy’s labor demand curve to the right • Menambahkan guna tenaga dan output Increasing employment and output

28. How To Increase Employment and the LFPR • Efforts to create growth in labor force participation are controversial • In recent decades, those who prefer an activist government have favored policies to increase labor demand • Through government-sponsored training programs, more aid to college students, employment subsidies to firms, etc. • Those who prefer a more laissez-faire approach have generally favored policies to increase labor supply by decreasing government involvement • Lower taxes or a less generous social safety net

29. Employment Growth: LFPR vs. Population • Pertambahan dalam guna tenaga adalah sumber penting pertumbuhan ekonomi di US dan negara-negara lain • Increases in employment have been an important source of economic growth in United States and many other countries • Berpunca drp pertambahan penduduk dan bukan pertambahan kepada LFPR • Has been almost entirely due to increases in population, rather than increases in labor force participation

30. Labor force participation rate did account for growth in living standards during 1970s and 1980s as women—especially married women—entered labor force at much higher rates than previously • But by 1990, this source of growth in living standards was exhausted • LFPR did not rise during 1990s and is not projected to rise in near future

31. Usaha untuk meningkatkan taraf hidup dengan menambhkan LFPR mempunyai dua kelemahan Efforts to increase living standards by raising LFPR have two serious drawbacks • LPFR tidak boleh mewujudkan pertumbuhan taraf hidup secara indifinit kerana nisbah ini tertakluk kpd had sebanyak 100 % • LFPR cannot create rapid growth in living standards indefinitely, because there is a logical upper limit of 100% • Dalam ekonomi-ekonmi maju, meningkatkan LFPR bermakana mereka yg tidak ignin bekerja mesti mengubah sikap dan mesti bekerja • In developed economies, raising LFPR means that people who currently do not want jobs must change their minds and want to work

32. Growth in Productivity • Kita telah ketepikan variabel yg tidak dapat menerangkan peningkatan taraf hidup dalam jangka masa panjang • We eliminated variables that could not explain rising living standards over long-run • Petumbhan penduduk Ruled out population growth • Based on logic of equation for total output per person • Pertumbumbuhan purata jam bekerja Ruled out growth in average hours • Because of upper limit on this variable’s growth and high opportunity cost paid to raise hours per worker when most of labor force is already working full-time • Peningkatan LFPR Ruled out increases in labor force participation • At least as a source of continual, rapid economic growth

33. Tinggal hanya satu variabel Only one variable remains • ProduktivitiProductivity • Bolehkah kita buat sesuatu supaya produktitviti bertambah dengan cepat • Can we do anything to make productivity grow even faster?

34. Real Output Millions of Workers Figure 4: Capital Accumulation and Labor Productivity D $8 trillion $7 trillion A 100

35. Growth in the Capital Stock • Kunci kpd pertumbuhan produktiviti ialah pertumbuhan stok modal • One key to productivity growth is growth in nation’s capital stock • Jumlah modal tiap-tiap pekerja Amount of capital available for average worker • Dengan lebih modal sebilangan pekerja boleh menghasilkan lebih output drp sebelumnya With more capital a given number of workers can produce more output than before • Oleh sebab bilangan yg sama bekerja jumlah jam yg sama dan dengan lebih output akan meningkatkan produktiviti • Since same number of workers are working same number of hours, but producing more output than before, productivity rises

36. Pertumbuhan stok modal akan menambahkan produktiviti selagi ianya menambahkan amaun modal tiap2 pekerja • Growth in capital stock will increase productivity as long as it increases amount of capital per worker • Sekiranya stok modal bertambah lebih cepat drp guna tenaga ,modal tiap2 pekerja akan bertambah dan seterusnya produktiviti akan bertambah • paeIf capital stock grows faster than labor force then capital per worker will rise • Labor productivity will increase along with it • Sekiranya bertambah perlahan drp buruh, modal tiap2 pekerja akan berkurang dan produktiviti buruh akan jatuh • But if capital stock grows more slowly than labor force, then capital per worker will fall • Labor productivity will fall as well

37. Investment and the Capital Stock • Pertambahan kpd stok modal memainkan peranan yg penting dalam pertumbuhan ekonomi • An increase in capital stock plays a central role in economists’ thinking about growth • Menyumbangkan kpd peningkatan produktiviti buruh dan membantu meningkatkan taraf hidup • Contributes to a rise in labor productivity and helps to raise living standards

38. Investment and the Capital Stock • Variabel stok mengukur kuantiti pada sesuatu masa • A stock variable measures a quantity at a moment in time • Stok modal merangkumi /mengukur jumlah plant dan alat dalam ekonomi • Capital stock is a measure of total plant and equipment in economy at any moment • Pelaburan terancang adalah variabel aliran Planned investment is a flow variable • Mengukur sesuatu peroses untuk sesuatu jangka masa Measures a process that takes place over a period of time • Selagi pelaburan adalah lebih besar drp susutniali, jumlah stok modal akan naik As long as investment is greater than depreciation, total stock of capital will rise • Lebih besar aliran pelaburan, lebih cepat peningkatan stok modal The greater the flow of investment, the faster will be the rise in capital stock

39. Targeting Businesses: Increasing the Incentive to Invest • One kind of policy to increase investment targets the business sector itself • With goal of increasing planned investment spending • Corporate profits tax • Tax on profits earned by corporations • Investment tax credit • A reduction in taxes for firms that invest in certain favored types of capital • Reducing business taxes or providing specific investment incentives can shift the investment curve rightward • Speeding growth in physical capital • Increasing growth rate of living standards

40. Interest Rate Funds ($ Trillions) Figure 5: An Increase In Investment Spending Supply of Funds (Saving) B 5% A C 3% New Demand for Funds Original Demand for Funds 1.5 1.75 2.25

41. Targeting Households: Increasing the Incentive to Save • Sektor isirumah yg menawarkan funds kpd firma melalui tabungan persendirian • While firms make decisions to purchase new capital, it is largely households that supply firms with funds, via personal saving • Petambahan perbelanjaan pelaburan berpunca drp sektor isirumah, melalui pertambanhan keinginan untuk menambung An increase in investment spending can originate in household sector, through an increase in desire to save • Sekiranya isirumah membuat keputusan menjimat lebih pendapatan pada i yg diberikan , keluk penawaran funds akan bergerak ke kanan If households decide to save more of their incomes at any given interest rate • Supply of funds curve will shift rightward

42. Targeting Households: Increasing the Incentive to Save • Apa akan menyebabkan isirumah menambahkan tabungan? What might cause households to increase their saving? • Greater uncertainty about economic future • Increase in life expectancy • Anticipation of an earlier retirement • Change in tastes toward big-ticket items • Change in attitude about saving • Any of these changes—if they occurred in many households simultaneously—would shift saving curve to the right • But government policy can increase household saving as well • One often-proposed idea is to decrease capital gains tax

43. Targeting Households: Increasing the Incentive to Save • Another frequently proposed measure is to switch from current U.S. income tax • Taxes all income whether it is spent or saved • To a consumption tax • Would tax only the income that households spend • Another proposal to increase household saving is to restructure U.S. Social Security system • Provides support for retired workers who have contributed funds to system during their working years • Government can alter tax and transfer system to increase incentives for saving • If successful, these policies would • Make more funds available for investment • Speed growth in capital stock • Speed rise in living standards

44. Interest Rate Funds ($ Trillions) Figure 6: An Increase In Savings Original Supply of Funds New Supply of Funds B F 5% C 3% Investment Spending 1.75 2.25 2.5

45. Interest Rate Funds ($ Trillions) Figure 7: Deficit Reduction and Investment Spending Supply of Funds (Saving) E A 5% B 3% Investment Spending Investment Spending + Deficit 1.0 1.5 1.75

46. Shrinking the Government’s Budget • A final pro-investment measure is directed at government sector itself • A decrease in government purchases results in • Raising consumption and investment • Link between government budget, interest rate, and investment spending is major reason why U.S. government, and governments around the world, try to reduce and, if possible, eliminate budget deficits • Shrinking deficit or rising surplus tends to reduce interest rates and increase investment • Speeding growth in capital stock • In 1990s, Congress set strict limits on growth of government spending • Budget deficit began shrinking

47. Shrinking the Government’s Budget • When George W. Bush took office in 2001, direction of growth policy shifted away from preserving budget surpluses and toward lower tax rates • A second tax cut in 2003—amounting to $350 billion over 10 years—increased current and project deficits further • Tax cuts included some elements to increase investment spending • Such as a lower tax rate for capital gains and tax incentives for investment by small businesses • But the tax cuts • By raising current and future budget deficits would increase interest rates • Worked in opposition to the growth benefits of tax cut

48. An Important Proviso About the Government Budget • A reduction in the deficit or an increase in the surplus—even if they stimulate private investment—are not necessarily pro-growth measures • Depends on how the budget changes • The answers can make a big difference to the impact on growth • Government investment in new capital and in maintenance of existing capital makes an important contribution to economic growth • Impact of deficit reduction on economic growth depends on which government programs are cut • Shrinking deficit by cutting government investment will not stimulate growth as much as would cutting other types of government spending

49. Human Capital and Economic Growth • Sumber manusia Human capital • Kemahiran dan pengetahuan Skills and knowledge possessed by workers • Kesan Pertambahan sumber manusia adlah seperti pertambahan modal fizikal – output akan bertambah An increase in human capital works like an increase in physical capital to increase output • Menyebabkan fungsi pengeluaran bergerak ke atas Causes production function to shift upward • Meningkatkan produktiviti dan taraf hidup • Raises productivity and increases average standard of living

50. Persamaan di antara sumber manusia dan modal fizikal Another similarity between human and physical capital • Kedua-dua stok bertambah apabila aliranpelaburan bertambah Both are stocks that are increased by flows of investment • Pelaburan dakam sumber manusia dibuat oleh firma, kerajaan dan isirumah Human capital investments are made by business firms, by government, and by households