Download Ch. 16: Economic Growth

Ch. 16: Economic Growth:
Resources, Technology, and
Ideas
James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University
©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning
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What is Economic
Growth?


Absolute Real Economic Growth:
an increase in Real GDP from one
period to the next.
Per Capita Real Economic Growth:
an increase from one period to the
next in per capita Real GDP, which is
Real GDP divided by population.
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Do Economic Growth
Rates Matter?

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If a country has a 3 percent annual growth
rate, Real GDP will take 24 years to double
(72/3).
If a country has a 4 percent annual growth
rate, Real GDP will take 18 years to double
(72/4).
Rule of 72: Divide 72 by the annual growth
rate to determine the number of years it will
take to double in size.
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Exhibit 1: Absolute Real Economic
Growth Rates for the United
States, 1990–2002
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Economic Growth Rates for Selected
Countries, 2002
Country
Percentage Growth Rate in Real
GDP
Per Capita Real
GDP
Argentina
-10.9%
$10,500
Australia
3.6%
$26,900
Bangladesh
4.8%
$1,800
Belgium
0.7%
$29,200
Canada
3.3%
$29,300
Cuba
1.1%
$2,700
Egypt
3.2%
$4,000
Germany
0.2%
$26,200
Iran
7.6%
$6,800
Israel
-0.8%
$19,500
Turkey
7.8%
$7,300
United States
2.4%
$36,300
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Exhibit 2: Economic Growth from an
Inefficient Level of Production
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Exhibit 3: Economic Growth from an
Efficient Level of Production
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Economic Growth and the
Price Level

Economic Growth can
occur with:
– a falling price level;
– a rising price level;
– A stable price level.

In recent decades, the
US economy has
witnessed economic
growth with a rising
price level.
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What Causes Economic
Growth?
Natural Resources
 Labor
 Capital
 Technological Advances
 Free Trade as Technology
 Property Rights Structure
 Economic Freedom

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Exhibit 4: Investment and Per Capita
Real Economic Growth for
Selected Countries, 1970–1990
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Policies to Promote
Economic Growth


When the economy is situated below its PPF,
demand inducing expansionary monetary or
fiscal policy is often advocated.
There are supply-side policies too:
–
–
–
–
–
–
–
natural resources
Labor
increases in human capital
increases in physical capital investment
technological advances
property rights structure
economic freedom.
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What About Industrial
Policy?



Industrial policy: a deliberate government policy of
aiding those industries that are most likely to succeed in
the world marketplace.
Pro: Government needs to work with business firms in
the private sector to help them compete in the world
marketplace.
Con:
– government may favor industries with more political
influence
– officials who design policy don’t know what will be
the industries of the future
– officials are likely to hamper growth if they provide
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protection to certain industries.
Economic Growth and
Special Interest Groups

Types of Economic Policies
– Growth-Promoting
– Transfer-Promoting


In The Rise and Decline of Nations, Olson
argues special interest groups are more likely
to argue for transfer-promoting policies.
Numerous and politically strong special
interest groups are detrimental to economic
growth.
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Self-Test



“Economic Growth refers to an
increase in GDP.” Comment.
Country A has witnessed both
economic growth and a rising price
level during the past two decades.
What does this imply about the LRAS
and AD curves?
How can capital investment promote
economic growth?
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New Growth Theory



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Technology is endogenous; it is a central part
of the economic system.
Amount and quality of technology developed
depends on the amount of resources devoted
to it.
One person trying to advance technology has
a much smaller chance of success than
hundreds of thousands of persons trying.
The theory also places emphasis on the
process of discovering and formulating ideas.
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Discovery, Ideas, and
Institutions


If the process of
discovering ideas is
important to
economic growth,
then it behooves us
to figure out ways
to promote the
discovery process.
Employee flexibility
is becoming a
larger part of the
US economy.
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Expanding Our Horizons


“Economic Growth
occurs whenever people
take resources and
rearrange them in ways
that are more valuable.”
If we believe ideas are
important to economic
growth, then we need
to have ideas as to how
to generate more ideas:
these are meta-ideas.
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Self-Test

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What are two worries about future
economic growth?
If technology is endogenous, what are
the implications for economic growth?
According to new growth theory, what
countries will be the countries that
grow the fastest in the next century?
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