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Chapter 9
Global
Economic
Growth and
Development
Introduction
About half of all U.S. engineers and
computer scientists with Ph.D. degrees
were born outside the United States.
In this chapter, you will learn why
countries that attract and retain the
world’s brainiest and hardest-working
people tend to experience the highest
sustained rates of economic growth.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
9-2
Learning Objectives
• Define economic growth
• Recognize the importance of economic
growth rates
• Explain why productivity increases are
crucial for maintaining economic growth
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9-3
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
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
9-4
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
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9-5
Did You Know That...
• Only one European nation,
Luxembourg, has per capita real GDP
higher than the U.S. per capita GDP?
• Per capita GDP has grown more rapidly
in some U.S. states than in some
European nations?
• These states have experienced a
higher rate of economic growth?
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9-6
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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9-7
Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity
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9-8
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.
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9-9
How Do We Define
Economic Growth? (cont'd)
• Economic Growth
 Increase in per capita real GDP measured
by its rate of change per year
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9-10
Figure 9-2 The Historical Record
of U.S. Economic Growth
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9-11
Table 9-1 Per Capita Real GDP
Growth Rates in Various Countries
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9-12
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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9-13
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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9-14
Table 9-2 Costs and Benefits
of Economic Growth
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9-15
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?
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9-16
Table 9-3 One Dollar Compounded
Annually at Different Interest Rates
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9-17
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
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5%
$11.5
trillion
9-18
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
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9-19
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)
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9-20
Figure 9-3 Factors Accounting for
Economic Growth in Selected Regions
Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics
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9-21
Example: Is Official Labor
Productivity Growth Overstated?
• BLS reports U.S. labor productivity has
increased by at least 21% since 2000.
• Self-employed people, managers, part-time,
and temporary employees are excluded.
• Including these forms of labor might reduce
productivity to as low as 11%.
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9-22
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.
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9-23
Figure 9-4 Relationship Between Rate
of Saving and Per Capita Real GDP
Source: World Bank
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9-24
New Growth Theory and
What Determines 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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9-25
New Growth Theory and
What Determines Growth (cont'd)
• Technology: a separate factor
of production
 The greater the rewards, the more
technological advances we will get.
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9-26
New Growth Theory and
What Determines 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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9-27
New Growth Theory and
What Determines 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%.
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9-28
New Growth Theory and
What Determines Growth (cont'd)
• The open economy and
economic growth
 Free trade encourages the spread
of technology.
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9-29
Figure 9-5 U.S. Patent Grants
Source: World Bank
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9-30
New Growth Theory and
What Determines Growth (cont'd)
• Innovation
 Transforming an invention into something
that is useful to humans
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9-31
Figure 9-6 The Relationship Between
Economic Growth and Tariff Barriers
to International Trade
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9-32
New Growth Theory and
What Determines 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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9-33
Figure 9-7 The Winnowing Process
of Research and Development
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9-34
New Growth Theory and
What Determines 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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9-35
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?
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9-36
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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9-37
Economic Development
• Question
 How did developed countries travel
paths of growth from extreme poverty to
relative riches?
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9-38
Economic Development (cont'd)
• Development Economics
 The study of factors that contribute to the
economic growth of a country
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9-39
Economic Development (cont'd)
• 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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9-40
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 per day.
 The U.S. poverty level exceeds the
average income of one-half the world.
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9-41
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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9-42
Figure 9-8 Expected Growth
in World Population by 2050, Panel (a)
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9-43
Figure 9-8 Expected Growth
in World Population by 2050, Panel (b)
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9-44
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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9-45
Economic Development (cont'd)
• The stages of development
 Agricultural stage
 Manufacturing stage
 Services stage
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9-46
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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9-47
Issues and Applications: Winners
and Losers in the Brain-Drain Game
• The losers: nations with huge outflows
of human capital; this damages
prospects for economic growth.
• The winners: countries receiving highly
skilled workers who immigrate and
provide a “brain-gain.”
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9-48
Figure 9-9 Nations with the
Largest Percentage Emigrations
of Skilled Workers
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9-49
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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9-50
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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9-51
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
• New growth theory
 Emphasizes how rewards to innovation
contribute to higher growth rates
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9-52
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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9-53
End of
Chapter 9
Global
Economic
Growth and
Development