Economics 4

## Lecture 14 - Economic Growth in the U.S. during the 20th Century

### Living Standards Over the 20th Century

One way of measuring the improvement in living standards is to look at how much our productivity in making the goods consumed in the past has improved.

Multiplication of Productivity 1895-2000

Time Needed for an Average Worker to Earn the Purchase Price of Various Commodities

 Commodity Time-to-Earn in 1895 (Hours) Time-to-Earn in 2000 (Hours) Productivity Multiple Horatio Alger (6 vols.) 21 0.6 35.0 One-speed bicycle 260 7.2 36.1 Cushioned office chair 24 2.0 12.0 100-piece dinner set 44 3.6 12.2 Hair brush 16 2.0 8.0 Cane rocking chair 8 1.6 5.0 Solid gold locket 28 6.0 4.7 Encyclopedia Britannica 140 33.8 4.1 Steinway piano 2400 1107.6 2.2 Sterling silver teaspoon 26 34.0 0.8

Source: 1895 Montgomery Ward Catalogue

The contribution to improved living standards depends on what goods you value and what set of weights you use.

Let's use measured real GDP per worker. In 2000 dollars:

```1900    \$16,861
2000    \$65,034

```

Real GDP per worker increased by a factor of 4 over the 20th Century. That's a growth rate of 1.4 percent a year.

However, that is surely an underestimate of the improvement in living standards.

1. decline in the working year from 2200 hours to 1600 hours
2. greater variety of goods and services available today

If we use the Boskin Commission estimate that unmeasured improvements in quality and the invention of new goods and new types of goods have led standard measures to understate true economic growth by 1 percent a year, then (in 2000 dollars):

```1900    \$6,203
2000   \$65,034

```

Living standards have improved 10 1/2 times during the 20th Century. That's without adjusting for the decline in the working year.

### Production Function

What are the reasons for this tremendous improvement in living standards?

Economic growth is an increase in output.

The production function describes the relationship between the quantity of inputs and the quantity of output.

Y = AF(L, K, H, N)

where
Y = output
A = the level of technology
F(.) = a function relating the quantity of inputs to the amount of output
L = number of workers
K = size of the capital stock
H = human capital (the knowledge, skills, training, and education of workers)
N = natural resources

The key to rising living standards is an increase in the productivity of labor.

Under certain assumptions,

Y/L = AF(K/L, H/L, N/L)

### Determinants of Productivity

1. physical capital - workers are more productive if they have more tools to work with because more tools allow work to be done more quickly and accurately
2. human capital - better trained workers are able to produce more goods and services
3. natural resources - not necessary for economic growth (e.g. Japan)
nonrenewable (exhaustible) resources
The supply of a nonrenewable resources is fixed. Once a quantity of the resource is used, it is gone forever. E.g. coal
renewable (nonexhaustible) resources
The supply of renewable resources can be replenished, e.g. trees

4. technological knowledge - understanding of the best ways to produce goods and services; human capital represents transmission of this knowledge to workers>

### Explanations for Productivity Slowdown

1. labor quality
• lower quality education
• demographic change
• changing attitudes towards work
2. technological innovation
3. other factors
• higher energy prices
• shift from manufacturing to services

 David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 DXL31@psu.edu www.yk.psu.edu/~dxl31