The Facts of Economic Growth
The first part of this chapter described the basic theories of economic growth. But economists have not been content to rest with theory. A major research area all around the world has been measuring the different components of the economic-growth process and’ applying them to the important theories, An understanding of the patterns of economic growth will help sort out the reasons that some nations prosper while others decline.
Figure 27-7 depicts the key trends of economic development for the United States in the twentieth century, Similar patterns have been found in most of the major industrial countries.
‘Figure 27-7(a) shows the trends in real GDP, the capital stock, and population, Population and employment have more than tripled since 1900. At the same time, the stock of physical capital has risen more than tenfold, Thus the amount of capital per worker (the K/L ratio) has increased by a factor of almost 3, Clearly, capital deepening has been an important feature of twentieth-century American capitalism.
What about the growth in output- Has output growth 11 less rapidly than’ capital. as would occur in a model that ignored technological change? No. The fact that the output curve in Figure 27-7(a) is not in between the two factor curves, but actually lies above the capital curve. demonstrates that technological progress must have increased the productivity 01′ capital and labor, Indeed, the capital-output ratio- • shown in Figure 27-7(b)-has fallen over time, rather than rising as would be expected in the capital accumulation model without technological progress.
For most people, an economy’s performance is measured h}’ earnings, shown in Figure 27-7(r) in terms of real average hourly earnings (or money’ earnings corrected 1’01’ inflation), Hourly earnings have grown pillar(‘said for inst of this century, as ,’C would expect from the growth in the capital labor ratio and from steady technological advance. The real interest rate (i.e., the Moloch~’interest rate minus the rate of inflation) is shown in Figure ’27-7(d). Interest rates and profit rates fluctuate greatly in, business cycles and wars but ‘display no strong trend upward or downward for the whole period. .Either by coincidence or because of an economic mechanism inducing this pattern, technological change has largely offset diminishing returns to capital.
Output per worker-hour is the solid black curve in Figure 27-7(c). As could be expected from the deepening of capital and from technological advance. output per worker has risen steadily.
The fact that wages rise at the same rate as output per worker does not mean that labor has captured all the fruits of productivity advance. Rather, it means that labor has kept about the same share of total product. with capital also earning about the same relative share throughout the period. Actually. a close look at Figure 27-7(c) shows that real wages grew slightly faster than output per worker in the first three quarters of the twentieth century. but then grew more slowly recently. Over the entire century. real wages grew by a factor of nine. which is almost exactly the growth in output per hour worked. This implies that labor’s share of national income (and therefore also property’s share) changed rely little over the course of the twentieth century:
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