Chapter 16: Problem 6

Discuss possible reasons for the slowdown in U.S. productivity growth that occurred in the 1970 s and 1980 s, and relate each reason to the equation for cconomic growth. Does the growth of TFP or of resources change?

Short Answer

Expert verified

Answer: The possible reasons for the slowdown in U.S. productivity growth in the 1970s and 1980s were lower investment in physical capital, an increase in regulatory burden, reduced investment in education and human capital, energy crisis, and decreasing growth of Total Factor Productivity (TFP). These factors impacted the growth of resources (capital, labor, and natural resources) and the growth of TFP in the economic growth equation, leading to a slowdown in overall economic growth.

Step by step solution

1. Identify the reasons for the slowdown in productivity growth

Some possible reasons for the slowdown in U.S. productivity growth in the 1970s and 1980s could be lower investment in physical capital, an increase in regulatory burden, reduced investment in education and human capital, energy crisis, and decreasing growth of TFP. We will discuss each of these factors and relate them to the equation for economic growth.

2. Lower Investment in Physical Capital

One reason for the slowdown in productivity growth is the decline in the rate of growth of physical capital. The equation for economic growth can be represented as Y = A * F(K, L, N), where Y is output, A represents TFP, F(K, L, N) represents the production function that involves capital (K), labor (L), and natural resources (N). A decrease in the growth of physical capital (K) would directly lead to a slowdown in economic growth.

3. Increased Regulatory Burden

Increased regulation in the 1970s and 1980s could have led to a reduction in the growth of TFP (A). Regulations can reduce the efficiency with which inputs are turned into outputs, and hence slow down the productivity growth.

4. Reduced Investment in Education and Human Capital

Investment in education directly affects the growth of labor productivity. A decrease in investment in education and human capital could have resulted in a decrease in labor productivity growth (L), thus slowing down overall economic growth according to the economic growth equation.

5. Energy Crisis

The energy crisis in the 1970s had an impact on economic growth. Since energy is a significant natural resource (N) in the production function, the energy crisis would impact the growth of natural resources and slow down the economic growth.

6. Decreasing Growth of TFP

Total Factor Productivity (TFP), represented by A in the economic growth equation, is a measure of how efficiently inputs are used in the production process. Decreasing growth of TFP implies that the production process was becoming less efficient, directly affecting economic growth. In conclusion, the slowdown in U.S. productivity growth that occurred in the 1970s and 1980s can be attributed to various reasons, impacting both the growth of resources (capital, labor, and natural resources) and the growth of Total Factor Productivity. By analyzing these factors, we can better understand the impact on the overall economic growth equation.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!