Key Terms

Key Terms

aggregate production function the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita capital deepening an increase by society in the average level of physical and/or human capital per person compound growth rate the rate of growth when multiplied by a base that includes past GDP growth contractual rights the rights of individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance convergence pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes human capital the accumulated skills and education of workers Industrial Revolution the widespread use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s infrastructure a component of physical capital such as roads and rail systems innovation putting advances in knowledge to use in a new product or service invention advances in knowledge labor productivity the value of what is produced per worker, or per hour worked (sometimes called worker productivity) modern economic growth the period of rapid economic growth from 1870 onward physical capital the plant and equipment that firms use in production; this includes infrastructure production function the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use rule of law the process of enacting laws that protect individual and entity rights to use their property as they see fit. Laws must be clear, public, fair, and enforced, and applicable to all members of society special economic zone (SEZ) area of a country, usually with access to a port where, among other benefits, the government does not tax trade technological change a combination of invention—advances in knowledge—and innovation technology all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products

Key Concepts and Summary

7.1 The Relatively Recent Arrival of Economic Growth

Since the early nineteenth century, there has been a spectacular process of long-run economic growth during which the world’s leading economies—mostly those in Western Europe and North America—expanded GDP per capita at an average rate of about 2% per year. In the last half-century, countries like Japan, South Korea, and China have shown the potential to catch up. The Industrial Revolution facilitated the extensive process of economic growth, that economists often refer to as modern economic growth. This increased worker productivity and trade, as well as the development of governance and market institutions.

7.2 Labor Productivity and Economic Growth

We can measure productivity, the value of what is produced per worker, or per hour worked, as the level of GDP per worker or GDP per hour. The United States experienced a productivity slowdown between 1973 and 1989. Since then, U.S. productivity has rebounded for the most part, but annual growth in productivity in the nonfarm business sector has been less than one percent each year between 2011 and 2016. It is not clear what productivity growth will be in the coming years. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita.