ECONOMICS U$A
Episode 25

ECONOMIC GROWTH

PURPOSE:
To show two of the major determinants of the economy’s growth in the 20th century, and to examine whether the continuation of growth is threatened by the depletion of natural resources.

OBJECTIVES:
1. Approximately one-third of the growth in output per person is due to the increasing quantity of capital per worker and economies of scale.

2. Technological change may have accounted for half of the economy’s growth.

3. Scarcity of natural resources may impede economic growth but such scarcities have been overcome in the past.
a) prices will increase for useful resources that become scarce, encouraging conservation, substitutes, and the utilization of high-cost sources of the scarce resources.
b) New technologies may reduce the economy’s dependence on the depleted resources.

KEY ECONOMIC CONCEPTS:
technological change, capital investment, forgone consumption, labor productivity, price incentives, economies of scale, capital/output ratio.

Contemporary Issues Economic Growth

During the 1990s trend economic growth was between 3% and 3.5% in the U.S., between 2% and 2.5% in Europe, and between 1% and 1.5% in Japan. What accounted for these differences? Part of the answer was demographics. Population growth, which is one of the key determinants of growth, was growing faster in the U.S. than in Europe or Japan. The other key driver of long-term growth is productivity, which was also growing faster in the U.S. than in the other two economies, largely because of rapid changes in technology. What can economies do to boost long-term growth (population growth and/or productivity growth)?

For a complete transcript of this video program download TVpdf#25

Assembling the Model T Henry Ford’s Model T was a story of productivity and success. First, he designed the right car…the Model "T." Made for farmers, it would lurch through mud, ford streams, plow through the snow. Ford knew that if he could get the price of the car down he could tap that a market. To accomplish that he would have to improve productivity. To maintain his workers, he nearly doubled his workers wages. He standardized the production process through the assembly line process and all the parts.
The moving assembly line was the ultimate revolution. Each worker now had more equipment around him. And though wages had doubled, output increased much more. In two years, production of the Model "T" rose from 78,000 to 500,000 and the price came down to $600 a car…then in 1916 to $360 a car, making it affordable for everyman. And the Ford revolution had massive impact beyond the Model "T." His methods were adopted worldwide.

Comment and Analysis by Richard Gill
Henry Ford, in the first half of this century, gave us a textbook lesson on the factors that make for economic growth. He took advantage of the economies of scale. He also increased labor productivity by expanding the amount of machinery, plant and equipment each laborer had to work with. Thirdly, as an entrepreneur and innovator he did everything in new ways. He paid his workers more. He designed a basically different product. He introduced to the automobile industry a novel method of production: the assembly line
Satellite Technology
For decades Americans have supported a major investment in the space program and all its accomplishments, like communications satellites. But this new space technology also spawned great productivity on earth. It made it possible for business to connect with other parts of the world. American banking is thoroughly at home with global technology, servicing American companies instantly wherever they may be. Linked with high-speed computers, satellite communication has an impact on the availability of personal credit. Telecommunications and technology networks allow banks merchants to validate credit cards. So, for corporations and individuals, satellite technology is aiding productivity and growth. According to Albert Halprin of the FCC, virtually 50% of the nation’s gross national product is involved directly or indirectly with information use and transfer.

Comment and Analysis by Richard Gill
Ever since the steam engine in the 18th century, new technology has systematically revolutionized our lives. Growth in capital and labor, which does not necessarily represent any new way of doing things, represents only part of our economic growth Technology is responsible for nearly half of our total growth and, on a per capita basis, perhaps something like 75 or 80 percent of our growth.
Doomsayers
In 1972, a group of experts known as the Club of Rome issued a report called The Limits to Growth. They believe that with a constant doubling of population growth the pressure on land and supplies of food would be tremendous. Widespread famine and malnutrition would be all pervasive. On industry, the report concluded that if minerals and metals were consumed at the American rate, global supplies would be exhausted in a few decades. There message was that there will be a combination of forces that make it impossible for the high growth rate of industrialization and the high growth rate of population to continue. They were doomsayers.
Others pointed out though that there are other factors that can mitigate these predications. Population growth can level off. Anti-pollution technologies are available. New technology will be developed to keep fuel supplies flowing. Public prophesy about economic conditions fifty or one hundred years in the future is obviously difficult. But new technologies and the motivations of the marketplace are likely to overcome the doom and gloom predictions of groups like the Club of Rome.

Comment and Analysis by Richard Gill
Resource shortages set up a series of responses in the marketplace. It becomes more profitable to find more of this scarce resource. We get conservation, and we develop new products and means of production that use more plentiful resources. These responses have not only met the resource shortage problem but usually have overshot the mark by a great margin, leading to vast increases in our productive potentialities. In the cases of population growth and pollution, it is difficult to be quite so clear cut and can’t be counted on to solve the problem by itself.