Worth: Mankiw Economics 5e 216 PART I11 Growth Theory: The Economy in the Very Long Run gives a temporary monopoly to inventors of new products; the tax code offers tax breaks for firms engaging in research and development; and government agencies such as the National Science Foundation directly subsidize basic re- search in universities. In addition, as discussed above, proponents of industrial policy argue that the government should take a more active role in promoting specific industries that are key for rapid technological progress CASE STUDY The worldwide slowdown in economic growth Beginning in the early 1970s, world policymakers faced a perplexing problem- a global slowdown in economic growth. Table 8-2 presents data on the growth in real GDP per person for the seven major world economies. Growth in the United States fell from 2.2 percent to 1.5 percent, and other countries experi enced similar or more severe declines. Accumulated over many years, even a small hange in the rate of growth has a large effect on economic well-being. Real in- ome in the United States today is about 20 percent lower than it would have been had growth remained at its previous level. Why did this slowdown occur? Studies have shown that it was attributable to a fall in the rate at which the production function was improving over time. The appendix to this chapter explains how economists measure changes in the pro- duction function with a variable called total factor productivity, which is closely re lated to the efficiency of labor in the Solow model. There are, however, many hypotheses to explain this fall in productivity growth. Here are four of them. Measurement Problems One possibility is that the productivity slowdown did not really occur and that it shows up in the data because the data are flawed. As you may recall from Chapter 2, one problem in measuring inflation is correcting for changes in the quality of goods and services. The same issue arises when mea- suring output and productivity. For instance, if technological advance leads to more computers being built, then the increase in output and productivity is easy to measure. But if technological advance leads to faster computers being built, hen output and productivity have increased, but that increase is more subtle and harder to measure. Government statisticians try to correct for changes in quality, but despite their best efforts, the resulting data are far from perfect. Unmeasured quality improvements mean that our standard of living is rising nore rapidly than the official data indicate. This issue should make us suspicious of the data, but by itself it cannot explain the productivity slowdown. To explain a slow- down in growth, one must argue that the measurement problems got worse. There is some indication that this might be so As history passes, fewer people work in indus. tries with tangible and easily measured output, such as agriculture, and more work vices. Yet few economists believe that measurement problems were the full stor, in industries with intangible and less easily measured output, such as medical se Oil Prices When the productivity slowdown began around 1973, the obvious hypothesis to explain it was the large increase in oil prices caused by the actions of the OPEC oil cartel. The primary piece of evidence was the timing: productivity growth slowed at the same time that oil prices skyrocketed. Over time, however, User JoENA: Job EFFo1424: 6264_ ch08: Pg 216: 27105#/eps at 100sl ed,Feb13,20029:584MUser JOEWA:Job EFF01424:6264_ch08:Pg 216:27105#/eps at 100% *27105* Wed, Feb 13, 2002 9:58 AM gives a temporary monopoly to inventors of new products; the tax code offers tax breaks for firms engaging in research and development; and government agencies such as the National Science Foundation directly subsidize basic re￾search in universities. In addition, as discussed above, proponents of industrial policy argue that the government should take a more active role in promoting specific industries that are key for rapid technological progress. 216 | PART III Growth Theory: The Economy in the Very Long Run CASE STUDY The Worldwide Slowdown in Economic Growth Beginning in the early 1970s, world policymakers faced a perplexing problem— a global slowdown in economic growth.Table 8-2 presents data on the growth in real GDP per person for the seven major world economies. Growth in the United States fell from 2.2 percent to 1.5 percent, and other countries experi￾enced similar or more severe declines.Accumulated over many years, even a small change in the rate of growth has a large effect on economic well-being. Real in￾come in the United States today is about 20 percent lower than it would have been had growth remained at its previous level. Why did this slowdown occur? Studies have shown that it was attributable to a fall in the rate at which the production function was improving over time. The appendix to this chapter explains how economists measure changes in the pro￾duction function with a variable called total factor productivity, which is closely re￾lated to the efficiency of labor in the Solow model. There are, however, many hypotheses to explain this fall in productivity growth. Here are four of them. Measurement Problems One possibility is that the productivity slowdown did not really occur and that it shows up in the data because the data are flawed.As you may recall from Chapter 2, one problem in measuring inflation is correcting for changes in the quality of goods and services.The same issue arises when mea￾suring output and productivity. For instance, if technological advance leads to more computers being built, then the increase in output and productivity is easy to measure. But if technological advance leads to faster computers being built, then output and productivity have increased, but that increase is more subtle and harder to measure. Government statisticians try to correct for changes in quality, but despite their best efforts, the resulting data are far from perfect. Unmeasured quality improvements mean that our standard of living is rising more rapidly than the official data indicate.This issue should make us suspicious of the data,but by itself it cannot explain the productivity slowdown.To explain a slow￾down in growth, one must argue that the measurement problems got worse.There is some indication that this might be so.As history passes,fewer people work in indus￾tries with tangible and easily measured output, such as agriculture, and more work in industries with intangible and less easily measured output, such as medical ser￾vices.Yet few economists believe that measurement problems were the full story. Oil Prices When the productivity slowdown began around 1973, the obvious hypothesis to explain it was the large increase in oil prices caused by the actions of the OPEC oil cartel.The primary piece of evidence was the timing: productivity growth slowed at the same time that oil prices skyrocketed. Over time, however