Chap10pp

© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.

Fernando & Yvonn Quijano

Prepared by:

Chapter

10

Long-Run Economic Growth: Sources and Policies

© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 24

MySpace Meets the Chinese Economic Miracle

10.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth.

10.2 Use the economic growth model to explain why growth rates differ across countries.

10.3 Discuss fluctuations in productivity growth in the United States.

10.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.

10.5 Discuss government policies that foster economic growth.

Learning Objectives

…per capita GDP in China will double every eight years.

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Economic Growth Over Time and Around the World

Industrial Revolution The application of mechanical power to the production of goods, beginning in England around 1750.

Economic Growth from 1,000,000 B.C. to the Present

Learning Objective 10.1

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Why Did the Industrial Revolution Begin in England?

Makingthe

Connection

The British government’s guarantee of property rights set the stage for the Industrial Revolution.

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FIGURE 10-1

Average Annual Growth Rates for the World Economy

Economic Growth Over Time and Around the WorldEconomic Growth from 1,000,000 B.C. to the Present

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In the long run, small differences in economic growth rates result in big differences in living standards.


Why Do Growth Rates Matter?

Growth rates matter because an economy that grows too slowly fails to raise living standards.

Don’t Let This Happen to YOU!Don’t Confuse the Average Annual Percentage Change with the Total Percentage Change

Economic Growth Over Time and Around the WorldSmall Differences in Growth Rates Are Important

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The Benefits of an Earlier Start: Standards of Living in China and Japan

Makingthe

Connection

Sustained high rates of economic growth have helped Japan attain high living standards.

CHINA JAPAN

Life expectancy at birth 71.9 years 82.2 years

Infant mortality (per 1,000 live births) 23 3

Percentage of the population surviving on less than $2 per day 47% 0%

Percentage of the population with access to treated water 77% 100%

Percentage of the population with accessto improved sanitation 44% 100%

Internet users per 1,000 people 73 587

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FIGURE 10-2

GDP per Capita, 2006

Economic Growth Over Time and Around the World“The Rich Get Richer and . . . ”

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What Determines How Fast Economies Grow?

Economic growth model A model that explains growth rates in real GDP per capita over the long run.

Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work.

Technological change A change in the quantity of output a firm can produce using a given quantity of inputs.


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What Determines How Fast Economies Grow?

• Better machinery and equipment.

• Increases in human capital.


There are three main sources of technological change:

Human capital The accumulated knowledge and skills that workers acquire from education and training or from their life experiences.

• Better means of organizing and managing production.

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Per-worker production function The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant.


What Determines How Fast Economies Grow?The Per-Worker Production Function

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FIGURE 10-3

The Per-Worker Production Function

What Determines How Fast Economies Grow?The Per-Worker Production Function

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Technological change helps economies avoid diminishing returns to capital.

What Determines How Fast Economies Grow?Which Is More Important for Economic Growth: More Capital or Technological Change?

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FIGURE 10-4

Technological Change Increases Output per Hour Worked

What Determines How Fast Economies Grow?Technological Change: The Key to Sustaining Economic Growth

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Why Did the Soviet Union’s Economy Fail?

Makingthe

Connection

The fall of the Berlin Wall in 1989 symbolized the failure of Communism.

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Solved Problem 10-2Using the Economic Growth Model to Analyze the Failure of the Soviet Union’s Economy


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New growth theory A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

What Determines How Fast Economies Grow?New Growth Theory

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• Protecting intellectual property with patents and copyrights.

Patent The exclusive right to a product for a period of 20 years from the date the product is invented.

• Subsidizing research and development.

• Subsidizing education.

What Determines How Fast Economies Grow?New Growth Theory

Government policy can help increase the accumulation of knowledge capital in three ways:

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Schumpeter developed a model of growth that emphasized his view that new products unleash a “gale of creative destruction” in which older products—and, often, the firms that produced them—are driven out of the market.

What Determines How Fast Economies Grow?Joseph Schumpeter and Creative Destruction

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FIGURE 10-5

Average Annual Growth Rates in Real GDP per Hour Worked in the United States

Economic Growth in the United StatesEconomic Growth in the United States since 1950: Fast, Then Slow, Then Fast Again

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• Measurement problems

• High oil prices

• A decline in labor quality


Was It a Measurement Problem?

Was It the Effect of High Oil Prices?

Was It the Declining Quality of Labor?

The Productivity Slowdown Affected All Industrial Countries

Economic Growth in the United StatesWhat Caused the Productivity Slowdown of 1973–1994?

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Why Has Productivity Growth Been Faster in the United States than in Other Countries?

FIGURE 10-6

Productivity Growth in the

Leading Industrial Economies, 1996–2006

Economic Growth in the United StatesThe Productivity Boom: Are We in a “New Economy”?

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Why Isn’t the Whole World Rich?

Catch-up The prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.


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FIGURE 10-7

The Catch-up Predicted by the Economic Growth Model

Catch-up: Sometimes, but Not Always

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FIGURE 10-8

There Has Been Catch-up among Industrial Countries

Catch-up Among the Industrial Countries

Why Isn’t the Whole World Rich?Catch-up: Sometimes, but Not Always

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FIGURE 10-9

Most of the World Hasn’tBeen Catching Up

Are the Developing Countries Catching Up to the Industrial Countries?

Why Isn’t the Whole World Rich?Catch-up: Sometimes, but Not Always

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Solved Problem 10-4The Economic Growth Model’s Prediction of Catch-up


COUNTRY

REAL GDPPER CAPITA IN 1960

(2000 DOLLARS)

ANNUAL GROWTHIN REAL GDP

PER CAPITA, 1960–2004

Taiwan $1,443 6.26%

Tunisia 2,102 3.13

Brazil 2,643 2.36

Algeria 3,843 1.04

Argentina 7,838 0.76

COUNTRY

REAL GDPPER CAPITA IN 1960

(2000 DOLLARS)

ANNUAL GROWTHIN REAL GDP

PER CAPITA, 1960–2004

Japan $4,509 3.94%

Italy 7,167 2.70

France 8,531 2.58

United Kingdom 10,323 2.19

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Why Don’t More Low-Income Countries Experience Rapid Growth?

Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

Failure to Enforce the Rule of Law

Rule of law The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

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Failure to Enforce the Rule of Law

FIGURE 10-10

The Rule of Law and Growth

Why Isn’t the Whole World Rich?Why Don’t More Low-Income Countries Experience Rapid Growth?

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Wars and Revolutions


Wars have made it impossible for countries such as Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo to accumulate capital or adopt new technologies.

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Poor Public Education and Health

Low Rates of Saving and Investment


Many low-income countries have weak public school systems, so many workers are unable to read and write.

People who are sick work less and are less productive when they do work.

The low savings rates in developing countries contribute to a vicious cycle of poverty.

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The Benefits of Globalization

Foreign portfolio investment The purchase by an individual or a firm of stock or bonds issued in another country.

Globalization The process of countries becoming more open to foreign trade and investment.

Foreign direct investment (FDI) The purchase or building by a corporation of a facility in a foreign country.

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The Benefits of Globalization

FIGURE 10-11

Globalization and Growth

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Globalization and the Spread of Technology in Bangladesh

Makingthe

Connection

The spread of technology spurred Bangladesh’s booming clothing industry.

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Growth Policies


Enhancing Property Rights and the Rule of Law

Improving Health and Education

Policies with Respect to Technology

Policies with Respect to Saving and Investment

Is Economic Growth Good or Bad?

We have seen that even small differences in growth rates compounded over the years can lead to major differences in standards of living.

Therefore, there is potentially a very high payoff to government policies that increase growth rates.

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An Inside LOOK Entrepreneurship and Sustained Economic Growth in Europe

Feeling Brighter

Figure 1. To increase output per worker during the aftermath of World War II, Europe increased capital per worker.

Figure 2. To increase output per worker today, Europe must find new and innovative ways to produce.

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Catch-up

Economic growth model

Foreign direct investment (FDI)

Foreign portfolio investment

Globalization

Human capital

Industrial Revolution

Labor productivity

K e y T e r m s

New growth theory

Patent

Per-worker production function

Property rights

Rule of law

Technological change

Documents

Chap10pp