Download Chapter9 - QC Economics

Chapter 9
Global Economic
Growth and Development
Learning Objectives
• Define economic growth
• Recognize the importance of economic
growth rates
• Explain why productivity increases are
crucial for maintaining economic growth
9-2
Learning Objectives (cont'd)
• Describe the fundamental determinants of
economic growth
• Understand the basis of new growth theory
• Discuss the fundamental factors that
contribute to a nation’s economic
development
9-3
How Do We Define Economic
Growth?
• Economic growth can be shown graphically
by shifting the production possibilities curve
outward.
• Economic growth reflects the fact that more
of all goods can be produced within the
economy.
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Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity
9-5
How Do We Define Economic
Growth? (cont'd)
• Economic Growth
– Increase in per capita real GDP measured by its
rate of change per year
9-6
Figure 9-2 The Historical Record
of U.S. Economic Growth
Source: U.S. Department of Commerce.
9-7
International Example: Growth Rates
Around the World
• Table 9-1 shows the average annual rate of growth
of real GDP per person in selected countries since
1990.
• Even though the U.S. is one of the world’s richest
countries, our rate of economic growth in recent
decades has been in the mid-range.
• U.S. per capita real GDP has remained higher than
other nations because we have been able to sustain
growth over many decades.
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Table 9-1 Per Capita Real GDP
Growth Rates in Various Countries
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How Do We Define Economic
Growth? (cont'd)
• Question
– If your leisure time increases 1 hour/week and
your commute time to work increases by 2
hours/week, are you better off?
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How Do We Define Economic
Growth? (cont'd)
• Is economic growth bad?
– Some psychologists contend that growth makes
us worse off.
– As with all activities there are costs along with
benefits to growth.
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Table 9-2 Costs and Benefits
of Economic Growth
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How Do We Define Economic
Growth? (cont'd)
• The importance of growth rates
– Do we need to worry about small differences in
the economic growth rate?
9-13
Table 9-3 One Dollar Compounded
Annually at Different Interest Rates
9-14
Productivity Increases: The
Heart of Economic Growth
Economic growth = Rate of growth of capital +
Rate of growth of labor +
Rate of growth in the productivity
of capital and of labor
9-15
Productivity Increases: The Heart of
Economic Growth (cont'd)
• Labor Productivity
– Total real domestic output (real GDP) divided by
the number of workers (output per worker)
9-16
Figure 9-3 Factors Accounting for
Economic Growth in Selected Regions
Source: International Monetary Fund.
9-17
Example: Explaining the U.S. Lead in
Labor Productivity Growth
• During the past decade, labor productivity has increased by
about 9% in nations in the European Monetary Union, 13% in
Japan, 18% in the United Kingdom, and more than 27% in
the United States.
• One explanation is that U.S. firms face fewer legal restrictions
on opening and closing operations and hiring and firing
workers.
• Second, U.S. producers face more competition, which forces
them to be more efficient.
• Third, lower tax rates give U.S. workers greater incentives to
direct more time to developing skills on the job.
9-18
Saving: A Fundamental Determinant
of Economic Growth
• To have more consumption in the future,
you must consume less today and save the
difference between your consumption and
your income.
9-19
Figure 9-4 Relationship Between Rate of
Saving and Per Capita Real GDP
Source: World Bank.
9-20
New Growth Theory and the
Determinants of Growth
• New Growth Theory
– A theory of economic growth that examines the
factors that determine why technology, research,
innovation, and the like are undertaken and how
they interact
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New Growth Theory and the
Determinants of Growth (cont'd)
• Technology: a separate factor of production
– The greater the rewards, the more technological
advances we will get.
9-22
New Growth Theory and the
Determinants of Growth (cont'd)
• Research and development (R&D)
– Patents
• A government protection that gives an inventor the
exclusive right to make, use, or sell an invention for a
limited period of time (currently, 20 years)
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New Growth Theory and the
Determinants of Growth (cont'd)
• Research and development (R&D)
– Positive externalities and R&D
• For every 1% rise in the stock of R&D in the United
States alone, productivity worldwide increases by about
0.25%.
9-24
New Growth Theory and the
Determinants of Growth (cont'd)
• The open economy and economic growth
– Free trade encourages the spread of technology.
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Figure 9-5 U.S. Patent Grants
Source: U.S. Patent and Trademark Office.
9-26
New Growth Theory and the
Determinants of Growth (cont'd)
• Innovation
– Transforming an invention into something that is
useful to humans
– New growth theorists believe that real wealth
creation comes from innovation – and invention
is a facet of innovation
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New Growth Theory and the
Determinants of Growth (cont'd)
• The importance of ideas and knowledge
– Knowledge, ideas, and productivity are related;
ideas are what drive economic growth.
– Economist Paul Romer suggests that growth can
continue as long as we come up with new ideas.
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New Growth Theory and the
Determinants of Growth (cont'd)
• The importance of human capital
– Knowledge, ideas and, productivity are all tied
together.
– Human capital consists of knowledge people
acquire.
– Investing in human capital raises living
standards.
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Immigration, Property Rights,
and Growth
• Population and immigration as they affect
economic growth
– MIT economist Michael Kremer believes
population growth drives technological progress.
9-30
Immigration, Property Rights,
and Growth (cont'd)
• Question
– How can well-defined property rights stimulate
economic growth?
• Answers
– The more certain property rights are, the more
capital accumulation there will be.
– The more certain are property rights, the more
entrepreneurship there will be.
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Economic Development
• Question
– How did developed countries travel paths of
growth from extreme poverty to relative riches?
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Economic Development (cont'd)
• Development Economics
– The study of factors that contribute to the
economic growth of a country
• The goal of development economists is to
help the 4 billion people with low living
standards to join the 2 billion people with
moderately high ones.
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Economic Development (cont'd)
• Putting world poverty into perspective
– At least one-half of the world’s population lives
at subsistence level.
– 20% of the world lives on less than $1.50 per
day.
– The U.S. poverty level exceeds the average
income of one-half the world.
9-34
Economic Development (cont'd)
• Relationship between population growth and
economic development
– There are nearly 7 billion people on earth.
– By 2050, according to the U.N., world population
will be close to 9.1 billion.
– Growth will occur mainly in developing nations.
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Figure 9-7 Expected Growth in World
Population by 2050, Panel (a)
Source: United Nations.
9-36
Figure 9-7 Expected Growth in World
Population by 2050, Panel (b)
Source: United Nations.
9-37
Economic Development (cont'd)
• The relationship between population
growth and economic development
– Growth leads to smaller families.
– The more economic development occurs, the
slower the population growth rate.
– Birth rates decline with modernization.
• Reduced infant mortality
• People do not rely on children to take care of them in
old age
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Economic Development (cont'd)
• The stages of development
– Agricultural stage
– Manufacturing stage
– Services stage
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Economic Development (cont'd)
• Keys to economic development
– Establishing a system of property rights
– Developing an educated population
– Letting “creative destruction” run its course
– Limiting protectionism
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Summary Discussion of Learning
Objectives
• Economic growth
– The rate of economic growth is the annual rate
of change in per capita GDP.
• Why economic growth rates are important
– Over long intervals, relatively small differences
in the economic growth rate can produce large
disparities in per capita incomes.
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Summary Discussion of Learning
Objectives (cont'd)
• Why productivity increases are crucial for
maintaining economic growth
– For a nation with a stable population and steady
capital growth, productivity growth is the main
factor in economic expansion.
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Summary Discussion of Learning
Objectives (cont'd)
• The key determinants of economic growth
– Increases in the labor force, the growth of capital, and the
growth of productivity
– Higher saving rates contribute to greater investment and
increased capital accumulation and growth
• New growth theory
– Emphasizes how rewards to innovation contribute to higher
growth rates
– Ideas and knowledge are crucial elements
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Summary Discussion of Learning
Objectives (cont'd)
• Fundamental factors that contribute to a
nation’s economic development
– Nations that encourage education, have a strong
system of property rights, allow creative
destruction, and avoid protectionism have higher
levels of economic development.
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