Based on the corresponding 2 chapters of this module, your Reflection paper should contain 400 words or more. You need to explain what you learned in the corresponding module using your own words.

chapter 7

By the end of this section, you will be able to: Explain the conditions that have allowed for modern economic growth in the last two centuries Analyze the influence of public policies on an economy's long-run economic growth Let's begin with a brief overview of spectacular economic growth patterns around the world in the last two centuries. We commonly refer to this as the period of modern economic growth. (Later in the chapter we will discuss lower economic growth rates and some key ingredients for economic progress.) Rapid and sustained economic growth is a relatively recent experience for the human race. Before the last two centuries, although rulers, nobles, and conquerors could afford some extravagances and although economies rose above the subsistence level, the average person's standard of living had not changed much for centuries. Progressive, powerful economic and institutional changes started to have a significant effect in the late eighteenth and early nineteenth centuries. According to the Dutch economic historian Jan Luiten van Zanden, slavery-based societies, favorable demographics, global trading routes, and standardized trading institutions that spread with different empires set the stage for the Industrial Revolution to succeed. The Industrial Revolution refers to the widespread use of power-driven machinery and the economic and social changes that resulted in the first half of the 1800s. Ingenious machinesthe steam engine, the power loom, and the steam locomotiveperformed tasks that otherwise would have taken vast numbers of workers to do. The Industrial Revolution began in Great Britain, and soon spread to the United States, Germany, and other countries. The jobs for ordinary people working with these machines were often dirty and dangerous by modern standards, but the alternative jobs of that time in peasant agriculture and small-village industry were often 168 7 Economic Growth Access for free at openstax.org dirty and dangerous, too. The new jobs of the Industrial Revolution typically offered higher pay and a chance for social mobility. A self-reinforcing cycle began: New inventions and investments generated profits, the profits provided funds for more new investment and inventions, and the investments and inventions provided opportunities for further profits. Slowly, a group of national economies in Europe and North America emerged from centuries of sluggishness into a period of rapid modern growth. During the last two centuries, the average GDP growth rate per capita in the leading industrialized countries has been about 2% per year. What were times like before then? Read the following Clear It Up feature for the answer. What were economic conditions like before 1870? Angus Maddison, a quantitative economic historian, led the most systematic inquiry into national incomes before 1870. Economists recently have refined and used his methods to compile GDP per capita estimates from year 1 C.E. to 1348. Table 7.1 is an important counterpoint to most of the narrative in this chapter. It shows that nations can decline as well as rise. A wide array of forces, such as epidemics, natural and weather-related disasters, the inability to govern large empires, and the remarkably slow pace of technological and institutional progress explain declines in income. Institutions are the traditions and laws by which people in a community agree to behave and govern themselves. Such institutions include marriage, religion, education, and laws of governance. Institutional progress is the development and codification of these institutions to reinforce social order, and thus, economic growth. One example of such an institution is the Magna Carta (Great Charter), which the English nobles forced King John to sign in 1215. The Magna Carta codified the principles of due process, whereby a free man could not be penalized unless his peers had made a lawful judgment against him. The United States in its own constitution later adopted this concept. This social order may have contributed to England's GDP per capita in 1348, which was second to that of northern Italy. In studying economic growth, a country's institutional framework plays a critical role. Table 7.1 also shows relative global equality for almost 1,300 years. After this, we begin to see significant divergence in income (not in the table).

These waves of catch-up economic growth have not reached all shores. In certain African countries like Niger, Tanzania, and Sudan, for example, GDP per capita at the start of the 2000s was still less than $300, not much higher than it was in the nineteenth century and for centuries before that. In the context of the overall situation of low-income people around the world, the good economic news from China (population: 1.4 billion) and India (population: 1.3 billion) is, nonetheless, astounding and heartening. Economic growth in the last two centuries has made a striking change in the human condition. Richard Easterlin, an economist at the University of Southern California, wrote in 2000: By many measures, a revolution in the human condition is sweeping the world. Most people today are better fed, clothed, and housed than their predecessors two centuries ago. They are healthier, live longer, and are better educated. Women's lives are less centered on reproduction and political democracy has gained a foothold. Although Western Europe and its offshoots have been the leaders of this advance, most of the less developed nations have joined in during the 20th century, with the newly emerging nations of sub-Saharan Africa the latest to participate. Although the picture is not one of universal progress, it is the greatest advance in the human condition of the world's population ever achieved in such a brief span of time. By the end of this section, you will be able to: Discuss the components of economic growth, including physical capital, human capital, and technology Explain capital deepening and its significance Analyze the methods employed in economic growth accounting studies Identify factors that contribute to a healthy climate for economic growth 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. In this module, we discuss some of the components of economic growth, including physical capital, human capital, and technology. The category of physical capital includes the plant and equipment that firms use as well as things like roads (also called infrastructure). Again, greater physical capital implies more output. Physical capital can affect productivity in two ways: (1) an increase in the quantity of physical capital (for example, more computers of the same quality); and (2) an increase in the quality of physical capital (same number of computers but the computers are faster, and so on). Human capital refers to the skills and knowledge that make workers productive. Human capital and physical capital accumulation are similar: In both cases, investment now pays off in higher productivity in the future. The category of technology is the "joker in the deck." Earlier we described it as the combination of invention and innovation. When most people think of new technology, the invention of new products like the laser, the smartphone, or some new wonder drug come to mind. In food production, developing more drought-resistant seeds is another example of technology. Technology, as economists use the term, however, includes still more. It includes new ways of organizing work, like the invention of the assembly line, new methods for ensuring better quality of output in factories, and innovative institutions that facilitate the process of converting inputs into output. In short, technology comprises all the advances that make the existing machines and other inputs produce more, and at higher quality, as well as altogether new products. It may not make sense to compare the GDPs of China and say, Benin, simply because of the great difference in population size. To understand economic growth, which is really concerned with the growth in living standards of an average person, it is often useful to focus on GDP per capita. Using GDP per capita also makes it easier to compare countries with smaller numbers of people, like Belgium, Uruguay, or Zimbabwe, with countries that have larger populations, like the United States, the Russian Federation, or Nigeria.

chapter 8

It was the most abrupt economic change in the post-World War II era. Between March 2020 and April 2020, the U.S. unemployment rate increased from 4.4% to 14.8%. As a result of the COVID-19 pandemic, millions of people were left without work as businesses shut down and people stayed home and cut their spending, especially on restaurants, tourism, and travel. As confidence and spending were slowly restored, and as the situation with the virus steadily improved, unemployment began to tick down. By 2022, with the availability of vaccines and boosters and other improved health measures, things were better still, but the presence of dangerous variants prevented a full return to normal. Unemployment 8 BRING IT HOME The COVID-19 pandemic had other effects on the labor market as well. Labor force participationthe rate at which people are employed or actively searching for workdeclined and as of early-2022 remained lower than it was in 2019. Some were forced to stop working because of school and childcare closures. Others were concerned about how safe their workplaces would be in the middle of a global pandemic. And still others simply chose to retire early. Labor force participation remains a sore spot in the labor market's recovery. These two statisticsunemployment and labor force participationshow how complicated the labor market can be. As the unemployment rate declined through 2021, the disappointing statistics on labor force participation show weak points. One day you may have read a headline about how easy it was to find a job, and the next day a headline would describe how difficult it was for employers to find workers. By the end of this chapter, you will be in a much better position to make sense of these events. Unemployment can be a terrible and wrenching life experiencelike a serious automobile accident or a messy divorcewhose consequences only someone who has gone through it can fully understand. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing from where the next paycheck is coming. There are painful adjustments, like watching your savings account dwindle, selling a car and buying a cheaper one, or moving to a less expensive place to live. Even when the unemployed person finds a new job, it may pay less than the previous one. For many people, their job is an important part of their self worth. When unemployment separates people from the workforce, it can affect family relationships as well as mental and physical health. The human costs of unemployment alone would justify making a low level of unemployment an important public policy priority. However, unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, economic resource are unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that the unemployed workers could have produced. This chapter will discuss how economists define and compute the unemployment rate. It will examine the patterns of unemployment over time, for the U.S. economy as a whole, for different demographic groups in the U.S. economy, and for other countries. It will then consider an economic explanation for unemployment, and how it explains the patterns of unemployment and suggests public policies for reducing it. 8.1 How Economists Define and Compute Unemployment Rate LEARNING OBJECTIVES By the end of this section, you will be able to: Calculate the labor force participation rate and the unemployment rate Explain hidden unemployment and what it means to be in or out of the labor force Evaluate the collection and interpretation of unemployment data Newspaper or television reports typically describe unemployment as a percentage or a rate. A recent report might have said, for example, from September 2021 to October 2021, the U.S. unemployment rate declined from 4.8% to 4.6%. At a glance, the changes between the percentages may seem small. However, remember that the U.S. economy has about 162 million adults (as of the beginning of 2022) who either have jobs or are looking for them. A rise or fall of just 0.1% in the unemployment rate of 162 million potential workers translates into 160,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. In April 2020, at the peak of the pandemic-induced recession, over 20 million people were out of work. Even with the unemployment rate at 4.2% in November 2021, about 7 million people who were looking for jobs were out of work. 194 8 Unemployment Access for free at openstax.org LINK IT UP The Bureau of Labor Statistics (http://openstax.org/l/BLS1) tracks and reports all data related to unemployment. Who's In or Out of the Labor Force? Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave. The point is that we do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reasonretirement, looking after children, taking a voluntary break before a new jobare not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force. The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force. Employed: currently working for pay Unemployed: Out of work and actively looking for a job Out of the labor force: Out of paid work and not actively looking for a job Labor force: the number of employed plus the unemployed Calculating the Unemployment Rate Figure 8.2 shows the three-way division of the 16-and-over population. In November 2021, about 61.8% of the adult population was "in the labor force"; that is, people are either employed or without a job but looking for work. We can divide those in the labor force into the employed and the unemployed. Table 8.1 shows those values. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs

There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working. Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of Labor Statistics publish a wide array of surveys and reports that try to measure these kinds of issues and to develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that CLEAR IT UP 198 8 Unemployment Access for free at openstax.org economic statistics are imperfect. Even imperfect measures like the unemployment rate, however, can still be quite informative, when interpreted knowledgeably and sensibly