Download Chapter 9 Global Economic Growth and Development

Chapter 9
Global Economic
Growth and
Development
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
Introduction
The Chinese government had issued relatively few
patents until the mid-2000s.
Since then, Chinese firms have obtained thousand of
patents.
Some economists suggest that those patents will help
China sustain the solid economic performance it has
experienced in recent years.
In this chapter, you will learn about how the use of
patents could contribute to a nation’s economic
performance.
Learning Objectives
• Define economic growth
• Recognize the importance of economic growth
rates
• Explain why productivity increases are crucial
for maintaining economic growth
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
Chapter Outline
• How Do We Define Economic Growth?
• Productivity Increases: The Heart of Economic
Growth
• Saving: A Fundamental Determinant of Economic
Growth
• New Growth Theory and the Determinants of
Growth
• Immigration, Property Rights, and Growth
• Economic Development
Did You Know That ...
• An infrared camera that was originally mounted on military
helicopters now has household applications?
• The camera has been incorporated into automobiles to enable
drivers to “see” farther into the dark than was possible with
standard headlights.
• This is just one example of innovation that many economists
agree as a determinant of economic growth—the topic of this
chapter.
How Do We Define Economic Growth?
• Economic growth
– can be shown graphically by shifting the
production possibilities curve outward
– reflects the fact that more of all goods can be
produced within the economy
Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity
•Distance of shift represents an increase in productive
capacity
How Do We Define Economic Growth?
(cont'd)
• Observation
– India has a real GDP more than fifteen times as
large as that of Denmark
– India’s population is about 200 times greater than
that of Denmark
– India is relatively poor and Denmark is relatively
rich
How Do We Define Economic Growth?
(cont'd)
• Economic Growth
– Increase in per capita real GDP measured by its
rate of change per year
Figure 9-2 The Historical Record
of U.S. Economic Growth
* Author’s estimate
Source: U.S. Department of Commerce.
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 1970.
• 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.
Table 9-1 Per Capita Real GDP Growth
Rates in Various Countries
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
Table 9-2 Costs and Benefits
of Economic Growth
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?
– A small difference in the rate of economic growth
does not matter very much for next year or the
year after, but it makes considerable difference for
the more distant future due to the power of
compounding
Table 9-3 One Dollar Compounded Annually at
Different Interest Rates
How Do We Define Economic Growth?
(cont'd)
• GDP in 50 years at various growth rates
starting at $1 trillion
3%
4%
$4.38
trillion
$7.11
trillion
5%
$11.5
trillion
How Do We Define Economic Growth? (cont'd)
• The Rule of 70
– A rule stating that the appropriate number of
years required for per capital real GDP to double is
equal to 70 divided by the average rate of
economic growth
– Example: At an annual growth rate of 10%, per
capita real GDP should double in about:
International Example: Tracking a Global Economic Growth
Divergence
• Between 2007 and 2009, the rate of growth in world per
capita real GDP dropped from about 6 percent to -0.5 percent.
• There was, however, a distinct difference in the growth rates
between advanced nations, such as the United States, and
developing nations, such as India.
• While the economic growth rate for developing nations
remained positive over that period, the rate of economic
growth across all advanced nations was below -3 percent by
2009.
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
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) or the
number of labor hours
– It increases whenever average output produced
per worker (or per hour worked) during a specific
time period increases
Figure 9-3 Factors Accounting for Economic Growth in
Selected Regions
Saving: A Fundamental Determinant of Economic
Growth
• Saving as a determinant of growth
– To have more consumption in the future, you have
to consume less today and save the difference
between your consumption and your income
International Example: The High Chinese Saving Rate and Its
Growth Implications
• Since the early 1970s, residents of China have increased their
overall rate of saving from 35 percent to 47 percent of real
GDP.
• The bulk of this saving has been channeled into capital
investment, which today accounts for more than 45 percent
of China’s total expenditures on final goods and services.
• These high rates of saving and investment in China help to
explain the nation’s annual rate of growth of per capita real
GDP in excess of 6 percent.
Figure 9-4 Relationship Between Rate of Saving and Per
Capita Real GDP
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
New Growth Theory and the
Determinants of Growth (cont'd)
• Technology: a separate factor of production
– When the rewards are greater, the more
technological advances will occur
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)
Figure 9-5 U.S. Patent Grants
Why Not … promote innovation by awarding more patents?
• It is already very easy to obtain a patent from the U.S. Patent
and Trademark Office.
• The Office sometimes even accidentally awards patents to
different applicants.
• Making patents easier to obtain would therefore not likely
promote innovation but instead it would encourage more
patent applicants to establish a property right through
litigation instead of research and development.
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%
New Growth Theory and the
Determinants of Growth (cont'd)
• The open economy and economic growth
– Free trade encourages the spread of technology
Figure 9-6 The Relationship Between Economic Growth and
Tariff Barriers to International Trade
International Example: What Economic Growth Success Stories
Have in Common
• A study has found that since 1950, 13 nations had
experienced 25-year periods of annual growth rates of at least
7 percent.
• One of the 5 characteristics common to these nations is their
openness to international trade.
• Furthermore, the periods of high economic growth ended for
several of these nations when their governments began
restricting flows of international trade.
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
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 and other new growth
theorists conclude that: economic growth can
continue as long as we keep coming up with new
ideas
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
Immigration, Property Rights, and
Growth
• Population and immigration as they affect
economic growth
– MIT economist Michael Kremer believes
population growth drives technological progress
• Question
– Does immigration spur economic growth?
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
Economic Development
• Question
– How did developed countries travel paths of
growth from extreme poverty to relative riches?
Economic Development (cont'd)
• Development Economics
– The study of factors that contribute to the
economic growth of a country
– The goal of economists studying development is
to help the 4 billion people with low living
standards to join the 2 billion people with
moderately high ones
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
Economic Development (cont'd)
• Relationship between population growth and
economic development
– There are nearly 6.5 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
Figure 9-7 Expected Growth in World Population by
2050, Panel (a)
Figure 9-7 Expected Growth in World Population by
2050, Panel (b)
Economic Development (cont'd)
• Relationship between population growth and
economic development
– In An Essay on the Principle of Population (1978),
Thomas Robert Malthus predicted that world
population growth would eventually outstrip food
supplies
– He was proved wrong as the supply of food has
been expanding faster than the increase in
demand caused by increased population
Economic Development (cont'd)
• 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
Economic Development (cont'd)
• The stages of development
– Agricultural stage
– Manufacturing stage
– Services stage
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
You Are There: A Nonabsorbable Fat Finally Finds a Market Niche
• In 1968, two chemists at Procter & Gamble invented a new
type of fat, olestra, which cannot be absorbed by human
bodies.
• The company launched this calorie-free fat in 1996, but then
took it off the shelves after discovering its undesirable
digestive side effects.
• Today olestra is used as the base for a new type of paint called
Sefose, which can be painted onto almost anything.
Issues & Applications: China Discovers the Growth Benefits of
Patents
• Since the mid-2000s, China’s government has worked hard to
enforce foreign patents and to spur innovative activity by
encouraging Chinese companies to apply for patents.
• Applications for patents by Chinese firms have increased
significantly since 2004.
• Since the late 2000s, Chinese companies have also obtained
over 1,000 patents per year in the United States.
Figure 9-8 Applications for and Awards of Patents in
China Since 1996
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
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
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
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