Page 420 - Krugmans Economics for AP Text Book_Neat

figure 38.1

Physical Capital and Real GDP
per worker
Productivity
Other things equal, a greater quantity of
physical capital per worker leads to
higher real GDP per worker but is sub-
ject to diminishing returns: each suc-
Productivity
cessive addition to physical capital per
worker produces a smaller increase in $60,000
productivity. Starting at point A, with 1. The increase C
in real GDP
$20,000 in physical capital per worker, 50,000
per worker B
a $30,000 increase in physical capital
becomes
per worker leads to an increase of smaller . . .
$20,000 in real GDP per worker. At 30,000 A
point B, with $50,000 in physical capi-
tal per worker, a $30,000 increase in
physical capital per worker leads to an
increase of only $10,000 in real GDP
per worker. 0 $20,000 50,000 80,000
Physical capital
2. . . . as physical capital per worker
per worker rises. (2000 dollars)

as productive as a worker with only a $15,000 tractor and no additional human cap-
Economists use growth accounting to
ital. But diminishing returns to any one input—regardless of whether it is physical
estimate the contribution of each major factor
capital, human capital, or labor—is a pervasive characteristic of production. Typical
in the aggregate production function to
estimates suggest that, in practice, a 1% increase in the quantity of physical capital
economic growth.
per worker increases output per worker by only one-third of 1%, or 0.33%.
In practice, all the factors contributing to higher productivity rise during the
course of economic growth: both physical capital and human capital per worker in-
crease, and technology advances as well. To disentangle the effects of these factors,
economists use growth accounting to estimate the contribution of each major factor
in the aggregate production function to economic growth. For example, suppose the
following are true:
■ The amount of physical capital per worker grows 3% a year.
■ According to estimates of the aggregate production function, each 1% rise in physi-
cal capital per worker, holding human capital and technology constant, raises out-
put per worker by one-third of 1%, or 0.33%.
In that case, we would estimate that growing physical capital per worker is responsi-
ble for 1 percentage point (3% × 0.33) of productivity growth per year. A similar but
more complex procedure is used to estimate the effects of growing human capital. The
procedure is more complex because there aren’t simple dollar measures of the quantity
of human capital.
Growth accounting allows us to calculate the effects of greater physical and human
capital on economic growth. But how can we estimate the effects of technological
progress? We can do so by estimating what is left over after the effects of physical and
human capital have been taken into account. For example, let’s imagine that there was
no increase in human capital per worker so that we can focus on changes in physical
capital and in technology. In Figure 38.2, the lower curve shows the same hypothetical
relationship between physical capital per worker and output per worker shown in Fig-
ure 38.1. Let’s assume that this was the relationship given the technology available in
1940. The upper curve also shows a relationship between physical capital per worker

378 section 7 Economic Growth and Productivity