Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Chapter 11. Long-Run Economic Growth: Sources
and Policies
Instructor: JINKOOK LEE
Department of Economics / Texas A&M University
ECON 203 502
Principles of Macroeconomics
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Economic Growth from 1,000,000 B.C. to the Present
No sustained economic growth occurred between 1,000,000 B.C. and 1300
A.D.
Industrial Revolution: The application of mechanical power to the
production of goods, beginning in England around 1750.
Following the Industrial Revolution, other countries (U.S., France, and
Germany) experienced long-run economic growth with sustained increases in
real GDP per capita.
This eventually raised living standards in those countries to the high levels
of today.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Economic Growth from 1,000,000 B.C. to the Present
Average Annual Growth Rates for the World Economy
World economic growth was essentially zero in the years before 1300
It was very slow before 1800.
The Industrial Revolution made possible the sustained increases in real
GDP per capita.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Factors Which Affect Economic Growth
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.
Economists believe two key factors determine labor productivity:
The quantity of capital per hour worked
The level of technology
The economic growth model focuses on changes in these factors to
explain changes in real GDP per capita.
Technological change: A change in the quantity of output a firm can
produce using a given quantity of inputs.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Per-worker Production Function
Per-worker production function: The relationship between real GDP per
hour worked and capital per hour worked, holding the level of technology
constant.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Per-worker Production Function
Increases in capital per hour worked increase output per hour worked
but at a diminishing rate.
At very high levels of capital per hour worked, further increases in
capital per hour worked will not result in any increase in real GDP per
hour worked.
This effect results from the law of diminishing returns
Law of Diminishing Returns: As we add more of one input, output
increases by smaller additional amounts.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Technological Change: The Key to Sustaining Economic Growth
Technological change shifts up the production function
It allows more output per hour worked with the same amount of capital
per hour worked.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Technological Change: The Key to Sustaining Economic Growth
Along Production function1 with $50,000 in capital per hour worked,
the economy can produce $575 in real GDP per hour worked.
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.
In the long run, a country will experience an increasing standard of
living only if it experiences continuing technological change.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Economic Growth in the United States since 1950
Average Annual Growth Rates in Real GDP per Hour Worked in the United
States
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.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Economic Growth in the United States since 1950
Can the United States Maintain High Rates of Productivity Growth?
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, and many expect it to continue.
Others are skeptical, arguing that by the early 2000s, innovations in
information and communications technology were having a greater effect
on consumer products than on labor productivity.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Catch-up: Sometimes, but Not Always
Catch-up: The prediction that the level of GDP per capita in poor
countries will grow faster than in rich countries.
According to the economic growth model,
Countries that start with lower levels of real GDP per capita should
grow faster than countries that start with higher levels of real GDP per
capita.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
There Has Been Catch-up among High-Income Countries
Countries such as Taiwan, Korea, and Singapore that had the lowest
incomes in 1960 grew the fastest between 1960 and 2009.
Countries such as Switzerland and the United States that had the
highest incomes in 1960 grew the slowest.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Most of the World Has Not Been Catching Up
Some countries such as Niger, Madagascar, actually experienced
negative economic growth.
Some middle-income countries such as Venezuela, hardly grew between
1960 and 2009.
Others such as Israel, experienced significant growth.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Why Have Not Most Western European Countries Caught Up to the United States?
The blue (red) bars show real GDP per capita in 1990 (in 2010)
relative to the United States.
In each case, relative levels of real GDP per capita are lower in 2010
than they were in 1990, which means that these countries have ceased
catching up to the United States.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Why Have Not Most Western European Countries Caught Up to the United States?
1
The level of legal protection of investors is relatively high in U.S.
financial markets, which encourages both U.S. and foreign investors to
buy stocks and bonds issued by U.S. firms.
2
The volume of trading in U.S. financial markets ensures that investors
will be able to quickly sell the stocks and bonds they buy.
3
This liquidity serves to attract investors to U.S. markets.
4
The ability of venture capital firms to finance technology-driven
“start-up” firms may be giving the United States an advantage in
bringing new products and new processes to market.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Enhancing Property Rights and the Rule of Law
A market system cannot work well unless property rights are enforced.
In many developing countries,
the rule of law and property rights are undermined by government
corruption.
it is hard for an entrepreneur to obtain a permit to start a business
without paying bribes, often to several different government officials.
Along those lines, there is some hope for reform movements that aim to
reduce corruption in developing countries today.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Improving Health and Education
As people’s health improves and they become stronger and less susceptible
to disease, they also become more productive.
Recent initiatives in developing countries to increase vaccinations against
infectious diseases, to improve access to treated water, and to improve
sanitation have begun to reduce rates of illness and death.
The rising incomes that result from government subsidies for education can
lessen the brain drain, which refers to highly educated and successful
individuals leaving developing countries for high-income countries.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Promoting Technological Change
For developing countries, the easiest way to gain access to technology is
through foreign direct investment, where foreign firms are allowed to build
new facilities or to buy domestic firms.
In high-income countries, governments can aid the growth of technology by
providing grants and tax breaks to universities and firms undertaking
research and development.
Economic Growth
Economic Growth Theory
Economic Growth in U.S.
Catch-Up
Growth Policies
Promoting Saving and Investment
Saving and investing will increase the equilibrium level of loanable funds and
may increase the level of real GDP per capita.
Governments can increase incentives for firms to engage in investment in
physical capital by using investment tax credits, which allow firms to deduct
from their taxes some fraction of the funds they have spent on investment,
thereby increasing its after-tax return.