Macro 6 voice07

Economics R. Glenn Hubbard, Anthony Patrick OBrien, 3e.

CHAPTER6Googles problems highlight one of the paradoxes of China in recent years: very rapid economic growth occurring in the context of government regulations that may ultimately stifle that growth.Long-Run EconomicGrowth: Sources and Policies

# of 39Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall Economics R. Glenn Hubbard, Anthony Patrick OBrien, 3e.Chapter 10: Long-Run Economic Growth: Sources and Policies1

Economic Growth over Time and around the WorldIndustrial 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 PresentDefine economic growth, calculate economic growth rates, and describe global trends in economic growth.10.1 LEARNING OBJECTIVE


Why Did the IndustrialRevolution Begin in England?

MakingtheConnection

The British governments guarantee of property rights set the stage for the Industrial Revolution.

YOUR TURN: Test your understanding by doing related problem 1.3 at the end of this chapter.Define economic growth, calculate economic growth rates, and describe global trends in economic growth.10.1 LEARNING OBJECTIVEMost economists accept the idea that economic growth is not likely to occur unless a countrys government provides the necessary type of institutional framework.


FIGURE 10-1Average Annual Growth Rates for the World EconomyEconomic Growth over Time and around the WorldEconomic Growth from 1,000,000 B.C. to the Present

World economic growth was essentially zero in the years before 1300, and it was very slowan average of only 0.2 percent per yearbefore 1800. The Industrial Revolution made possible the sustained increases in real GDP per capita that have allowed some countries to attain high standards of living.Define economic growth, calculate economic growth rates, and describe global trends in economic growth.10.1 LEARNING OBJECTIVE


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.Dont Let This Happen to YOU!Dont Confuse the Average Annual Percentage Change with the Total Percentage ChangeEconomic Growth over Time and around the WorldSmall Differences in Growth Rates Are ImportantDefine economic growth, calculate economic growth rates, and describe global trends in economic growth.10.1 LEARNING OBJECTIVE

YOUR TURN: Test your understanding by doing related problem 1.6 at the end of this chapter.


The Benefits of an EarlierStart: Standards of Livingin China and JapanCHINAJAPANLife expectancy at birth73.5 years82.1 yearsInfant mortality (per 1,000 live births20.32.8Percentage of the population surviving on less than $2 per day35%0%Percentage of the population with access to improved water source77%100%Percentage of the population with accessto improved sanitation44%100%Internet users per 1,000 people85 668

MakingtheConnectionAlthough China has experiencedrapid economic growth, its livingstandards are still well below thoseof Japan.


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


FIGURE 10-2GDP per Capita, 2008Economic Growth over Time and around the WorldThe Rich Get Richer and . . .

GDP per capita is measured in U.S. dollars, corrected for differences across countries in the cost of living.Define economic growth, calculate economic growth rates, and describe global trends in economic growth.10.1 LEARNING OBJECTIVE


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


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


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 FunctionUse the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


FIGURE 10-3The Per-Worker Production FunctionWhat Determines How Fast Economies Grow?The Per-Worker Production Function

The per-worker production function shows the relationship between capital per hour worked and real GDP per hour worked, holding technology constant. Increases in capital per hour worked increase output per hour worked but at a diminishing rate. For example, an increase in capital per hour worked from $20,000 to $30,000 increases real GDP per hour worked from $200 to $350. An increase in capital per hour worked from $30,000 to $40,000 increases real GDP per hour worked only from $350 to $475. Each additional $10,000 increase in capital per hour worked results in a progressively smaller increase in output per hour worked.Use the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


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


FIGURE 10-4Technological Change Increases Output per Hour WorkedWhat Determines How Fast Economies Grow?Technological Change: The Key to Sustaining Economic Growth

Technological change shifts up the production function and allows more output per hour worked with the same amount of capital per hour worked. For example, along Production function1 with $50,000 in capital per hour worked, the economy can produce $575 in real GDP per hour worked. However, an increase in technology that shifts the economy to Production function2 makes it possible to produce $675 in real GDP per hour worked with the same level of capital per hour worked.Use the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


What Explains the Economic Failure of the Soviet Union?

MakingtheConnection

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

YOUR TURN: Test your understanding by doing related problem 2.10 at the end of this chapter.Use the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVEA centrally planned economy, such as the Soviet Unions, could not, over the long run, grow faster than a market economy. The Soviet Union collapsed in 1991, and contemporary Russia now has a more market-oriented system, although the government continues to play a much larger role in the economy than does the government in the United States.


Using the Economic Growth Model to Analyze the Failure of the Soviet Unions Economy

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

10-2

YOUR TURN: For more practice, do related problems 2.7 and 2.8 at the end of this chapter.


New growth theory A model of long-run economic growth that 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 TheoryUse the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


Protecting intellectual property with patents and copyrights.Patent The exclusive right to produce 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 TheoryGovernment policy can help increase the accumulation of knowledge capital in three ways:Use the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


Schumpeter developed a model of growth that emphasized his view that new products unleash a gale of creative destruction that drives older productsand, often, the firms that produced themout of the market.What Determines How Fast Economies Grow?Joseph Schumpeter and Creative DestructionUse the economic growth model to explain why growth rates differ across countries.10.2 LEARNING OBJECTIVE


FIGURE 10-5Average Annual Growth Rates in Real GDP per Hour Worked in the United StatesEconomic Growth in the United StatesEconomic Growth in the United States since 1950Discuss fluctuations in productivity growth in the United States.10.3 LEARNING OBJECTIVE

The growth rate in the United States increased from 1800 through the mid-1970s. Then, for more than 20 years, growth slowed before increasing again in the mid-1990s.


Measurement problemsHigh oil prices Deterioration in the U.S. educational systemEconomic Growth in the United StatesWhat Caused the Productivity Slowdown of 19731994?Discuss fluctuations in productivity growth in the United States.10.3 LEARNING OBJECTIVEEconomic Growth in the United States since 1950Has the New Economy Increased Productivity?Productivity growth in the United States increased between 1995 and 2008 compared to the previous 20-year period. Some economists argue that the development of a new economy based on information technology caused the higher productivity growth that began in the mid-1990s.


FIGURE 10-6Productivity Growth in the Leading Industrial Economies, 19962008Economic Growth in the United States

Productivity growth as measured by the average annual growth rate of labor productivity was more rapid in the United States than in the other high-income countries during the years between 1995 and 2008.Discuss fluctuations in productivity growth in the United States.10.3 LEARNING OBJECTIVEProductivity Growth in theHigh-Income Economies, 1995-2008


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


Why Isnt the Whole World Rich?FIGURE 10-7The Catch-up Predicted by the Economic Growth ModelCatch-up: Sometimes, but Not Always

According to the economic growth model, countries that start with lower levels of real GDP per capita should grow faster (points near the top of the line) than countries that start with higher levels of real GDP per capita (points near the bottom of the line).Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


FIGURE 10-8There Has Been Catch-up among High-income CountriesCatch-up among High-Income CountriesWhy Isnt the Whole World Rich?Catch-up: Sometimes, but Not AlwaysLooking only at countries that currently have high incomes, countries such as Ireland and Japan that had the lowest incomes in 1960 grew the fastest between 1960 and 2008.Countries such as Switzerland and the United States that had the highest incomes in 1960 grew the slowest.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


FIGURE 10-9Most of the World Hasnt Been Catching UpAre the Developing Countries Catching Up to theHigh-income Countries?Why Isnt the Whole World Rich?Catch-up: Sometimes, but Not AlwaysLooking at all countries for which statistics are available does not show the catch-up predicted by the economic growth model. Some countries that had low levels of real GDP per capita in 1960, such as Niger, Madagascar, and the Democratic Republic of the Congo, actually experienced negative economic growth. Other countries that started with low levels of real GDP per capita, such as Malaysia and South Korea, grew rapidly. Some middle-income countries in 1960, such as Venezuela, hardly grew between 1960 and 2008, while others, such as Israel, experienced significant growth.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


Solved Problem

10-4The Economic Growth Models Prediction of Catch-up

COUNTRYREAL GDPPER CAPITA IN 1960(2000 DOLLARS)ANNUAL GROWTHIN REAL GDPPER CAPITA, 19602008Taiwan $1,4436.01%Tunisia2,1023.14Brazil2,6432.37Algeria3,8431.05Japan4,5093.73Italy7,1672.47Venezuela7,8380.82United Kingdom10,3232.14New Zealand12,0631.41

YOUR TURN: For more practice, do related problems 4.4 and 4.5 at the end of this chapter.

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


Why Isnt the Whole World Rich?Why Dont 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 LawRule of law The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


Wars and RevolutionsWhy Isnt the Whole World Rich?Why Dont More Low-Income Countries Experience Rapid Growth?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.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


Poor Public Education and HealthLow Rates of Saving and InvestmentWhy Isnt the Whole World Rich?Why Dont More Low-Income Countries Experience Rapid Growth?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 can contribute to a vicious cycle of poverty.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


What Do Parking Tickets in New York City Have to Do WithPoverty in the Developing World?

MakingtheConnection


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


Why Isnt the Whole World Rich?The Benefits of GlobalizationForeign 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.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


Why Isnt the Whole World Rich?The Benefits of GlobalizationFIGURE 10-10Globalization and GrowthDeveloping countries that were more open to foreign trade and investment grew much faster during the 1990s than developing countries that were less open.Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth.10.4 LEARNING OBJECTIVE


Growth PoliciesEnhancing Property Rights and the Rule of Law

Improving Health and Education

Policies that Promote Technological Change

Policies that Promote Saving and InvestmentWe 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. Discuss government policiesthat foster economic growth.10.5 LEARNING OBJECTIVE


Growth PoliciesAs with many other normative questions, economic analysis can contribute to the ongoing political debate over the consequences of economic growth, but it cannot settle the issue.Discuss government policiesthat foster economic growth.10.5 LEARNING OBJECTIVEIs Economic Growth Good or Bad?


Investment Spurs Chinas GrowthAN INSIDE LOOK>>

Continuous increases in capital per hour worked lead to smaller and smaller increases in output per hour worked.China Officials: Long Live Investment


Catch-upEconomic growth modelForeign direct investment (FDI)Foreign portfolio investmentGlobalizationHuman capitalIndustrial RevolutionLabor productivityNew growth theoryPatentPer-worker production functionProperty rightsRule of lawTechnological change

KEY TERMS


Technology

Macro 6 voice07