© 2000 John Petroff

1)- Long term growth rate of national income

Incomes of consumers have been increasing in step with gross domestic output and can be expected to do so in the future if none of the major factors that explain the growth are disturbed. The world economic output has been growing at a steady rate between 2% to 5% on average, with developing countries experiencing higher growth rates at times. For the past century the US economy has been growing at an average real rate of 2.9%. Comparing countries, during the period 1960-1988, the annual real growth rate of gross domestic product was 3.3% for the United States, 4.4% for Canada, 3.7% for France, 3.1% for Germany, 4.0% for Italy, 6.5% for Japan and 2.5% for the United Kingdom. This gives an average of 3.9% for these seven countries. More recently, growth rates have moderated: for the period 1978-1998 the average annual economic growth rate for the United States was 2.74%.

Table T-15.1 presents the famous Dennison's derivation of sources of growth in the United States published in 1985.

Economists explain long term economic growth by increased labor force, gains in productivity, gains from international trade and more concerted world politics leading to reduction or avoidance of wars. To make predictions about the future rate of growth, each of these elements must be analyzed. The last two factors are affected by attitudes of countries and cannot be reasonably assumed to be different from what they have been in the past 50 years. Should there be a clear signal from tensions between countries that this may not be the case in the coming years, a reduction in the growth would have to be made accordingly. (There were troubling signs in the demonstrations opposing globalization at the 1999 WTO meeting in Seattle, but it is not sure that they reflect opinions of the majority of the population, nor that governments will espouse these view points.)

Growth of the labor force is attributable to greater women participation and population growth. For Western countries, the proportion of women in the labor force has reached the same level as that of men. (It was actually slightly higher at 94% for women compared to 93.8% for men in 1995. The change took place rather rapidly: for instance, the labor force participation of women with children under 6 years grew from 18.6% in 1960 to 61.7% in 1994.) Thus little gain can be expected from increases in women labor force participation in the future. Population growth for Western European countries has been dropping and approaching zero at the end of the 20th century, averaging just 0.2%, with less than zero for some countries. While in the United States, the rate of population growth has also been dropping, it is still hovering around 1% for the past decades and is expected to be at this level in the near future.

Thus, the bulk of long run economic growth is attributable to productivity growth: two thirds for the United States (i.e. 68% to be precise, according to Dennison's breakdown shown in Table T-15.1), and much more for other OECD countries with no population growth. Productivity growth is attributable to breakthroughs in technology for durable goods, increased capital, economies of scale, better resource allocation and improvements in labor skills. Productivity growth has also been less than what it could be because of costly (but necessary) legal requirements in the field of pollution control and safety, and other impediments to output.

Over the past century, labor skills have improved considerably judging by the proportion of better educated population. For instance, in the United States, the proportion of population finishing high school increased from 13% at the beginning of past century, to over 86% at the end. In many developing countries literacy rates approach or exceed 90%. Thus, labor skills are likely to continue to improve in the future, but at slower rate than in the past. Net capital investment has been steady at roughly 10% of real gross national product for the past 50 years. Economies of scale seem to be a little more promising as globalization of markets and mergers across boarders become more common.

The best hope for continued economic growth rests with technological progress. Lower cost, smaller size and faster speed of computers is transforming all sectors of the economy, especially with its ease of access to information. The spreading of the internet assures that technological progress will continue to contribute substantially to productivity growth in the near future.

The previous remarks on the components of productivity growth were naturally intended to inquire whether the rate of economic growth can be readily predicted. These remarks are likely to suggest that the overall trend should remain at the same level, may be somewhat lower, but it isn't clear how much lower. It is therefore necessary to look at data that can shed some light. Table T-15.2 presents the rate of productivity growth in the United States measured by output per man hour. Since aggregate output used in this statistic is the variable that defines the business cycle, it is obvious that output per man hour is cyclical. The average for the period 1978-1998 was 1.7% per year.

To forecast GDP annual growth rate for the United States in the first few years of the century, one can add the recent annual productivity growth of 1.7% to the anticipated annual rate of growth of population of 1%, for a total of 2.7%. This is just slightly lower than the previous twenty years of 2.74%. (In 1999, the World Bank forecast of economic growth of the United States for the period 1999-2003 was 3.9%.)While our forecast of 2.7% seems a conservative forecast, in any given year, actual growth is unlikely to equal precisely that rate because the economy is cyclical and because socio-economic patterns will certainly change. To improve on the forecast, two different approaches are possible: one involves the use of econometric simulations or time-series analysis (discussed in the last section of this chapter), and the other requires a reevaluation of each component of productivity growth discussed above. This means that one would have to explain population growth and labor participation, technological progress and increase in automation, motivation for education and willingness to become an entrepreneur. Such explanations go beyond finance and economics, and border on sociology and psychology. So, next section will be limited to pointers for further research, rather than a complete treatment of a subject that is really outside the scope of this writing.

See review questions Q-15A.1 through Q-15A1.21.

See research assignment R-15A1.1 through R-15A1.5

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