Economic Growth:
(“Economics” – Chapters 8 and 9)
How can we define and what leads to economic growth?
Economic Growth and Development around the World:
“Economic Growth” and “Development” are desirable
goals for all societies (i.e., people in all countries would
prefer a higher standard of living for their current
generation and for future generations) => but, these goals
are in many ways “more urgent” in LDC’s (e.g., Chile,
Panama, Bolivia, Rwanda, Ethiopia, Bangladesh)
Economic Development – improvements (over time) in a
society’s quality of life and standard of living.
 by definition, very qualitative in nature.
 includes, but is not limited to, increased consumption
of and access to material goods and services
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Socioeconomic “Quality of Life” Measures:
 When assessing Economic Development, we would want
to look at changes in GDP… But, we would also want to
look further at things which would indicate a “higher
standard of living” => GDP Per Capita is clearly not the
only thing that matters for “overall quality of life.”
Other factors that are likely important:
 Life Expectancy at birth: expected lifespan at birth,
measured in years
 Infant Mortality Rate: number of deaths per 1,000
live births
 Literacy Rates: percentage of population over age of
15 that can read and write
 Internet Users: percentage of population that uses the
Internet
 Average Annual Working Time: average number of
hours worked per year per worker
Country
Japan
Australia
Italy
Canada
Norway
Germany
U.S.A.
Chile
Mexico
China
Estonia
Turkey
India
Ethiopia
Zimbabwe
Life
Expectancy
83.91
81.90
81.86
81.48
80.20
80.07
78.37
77.70
76.74
74.68
73.58
72.50
66.80
56.19
49.64
Infant
Mortality
2.78
4.61
3.38
4.92
3.52
3.54
6.06
7.34
17.29
16.06
7.06
23.94
47.57
77.12
29.50
Literacy
Rates
99%
99%
98%
99%
99%
99%
99%
96%
86%
92%
99%
87%
61%
43%
91%
Internet
Users
80.0%
76.0%
53.7%
81.6%
93.4%
81.9%
79.0%
45.0%
31.0%
34.3%
74.1%
39.8%
7.5%
0.75%
11.5%
Avg Annual
Work Time
1,728
1,693
1,774
1,702
1,426
1,413
1,787
2,047
2,250
not avail.
1,924
1,877
not avail.
not avail.
not avail.
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Economic Growth – sustained increases in the real GDP
of an economy over a long period of time.
 graphically illustrated by an outward shift of the PPF
Wheat
PPF 2012
PPF 1992
17,250
12,500
0
Cars
0
32,000
48,500
 measured quantitatively as the percentage increase in
Real GDP
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GDP Growth Rate – annual percentage change in the
value of Real GDP
 most countries typically experience moderate, positive
growth in most years.
Table 8.1 – Growth of Real GDP (1991-2007)
Country
Avg % Growth Per Year
China
10.4%
India
6.3%
Africa
3.8%
United States
3.0%
United Kingdom
2.5%
France
1.9%
Germany
1.7%
Japan
1.3%
 Catch-up Effect – the theory stating that (all other
factors fixed) the growth rates of less developed
countries will exceed the growth rates of developed
countries, allowing the less developed countries to
“catch up.”
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When observing GDP growth rates (or, for that matter, any
growth rate), keep in mind the cumulative effect of “growth
on top of growth”…
 Question: if a country were to grow at “9% per year,”
how long would it take for GDP to double (i.e.,
increase by 100%)?
 Hint: it might seem like the obvious answer is “about
11 years” (since (100/9)≈11)… but it’s actually a
shorter amount of time because in future years the
growth is “growth on top of growth”…
 Answer: it would actually only take about 8 years for
GDP to double… a more general approximation is
given by the “Rule of 72”…
“Rule of 72” – a variable that grows at a constant rate of
“X% per period” will double in value in approximately
“(72/X) periods.”
 What if India could grow at 9% per year for the next
32 years (China grew at roughly this rate between
1978 and 2008)…
 GDP would double approximately every 8 years
 Thus, they would experience “4 doublings”
 Which would imply that GDP would be “2 times 2
times 2 times 2” times larger – that is, “16 times”
larger – 32 years from now!
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What can lead to Economic Growth?
 Basically, any “change” which would place the PPC
further “from the origin”…
 Recall, “placement of PPC” depends upon how many
resources a society has available and how productive
those resources are…
Five broad sources of economic growth (i.e., changes that
would lead to an “outward movement of PPC over time”)...
1. Increases in the quantity of labor available (i.e., more
workers)
2. Increases in the quality of labor available (e.g., more
highly educated workforce)
3. Increases in the quantity of physical capital (e.g.,
factories, trucks, computers, electricity plants)
4. Embodied Technical Change – technical change that
results in an improvement in the quality of capital
(e.g., computers with word processors, as opposed to a
manual typewriter from the early 1900s).
5. Disembodied Technical Change – technical change
that results in a change in the production process,
which results in a different amount of output being
produced from the same quantities of capital and labor
(e.g., use of computers to reduce costs of transferring
information and to streamline accounting procedures)
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Common ways to achieve economic growth…
1. Deliberate investments in human capital and physical
capital (either by individuals or society)
 when a society devotes more resources to producing
capital goods today, they will have more capital
goods available in the future (but, at the expense of
having fewer consumer goods in the present period)
2012 PPC, if
“B” is chosen
in 1992…
Capital
Goods
1992
PPC
2012 PPC, if
“A” is chosen
in 1992…
B
A
Consumption
Goods
0
0
2. Deliberate investments by society in overhead capital
(social overhead capital – basic infrastructure projects
such as roads, power generation, and irrigation systems)
3. Realize improvements in technology (i.e., technical
change)
 The bulk of economic growth in recent decades and
recent centuries has resulted from improvements in
technology (e.g., Industrial Revolution)
 Technical change takes place in two stages…
i. Invention – an advance in knowledge
ii. Innovation – the application of new knowledge
to produce a new product or to produce an
existing product more efficiently
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Impediments to achieving growth…
I.
difficulties in developing physical capital
 Vicious-cycle-of-poverty hypothesis – poverty is
self-perpetuating because poor nations are unable to
save and invest enough to accumulate the capital
stock that would help them grow
 argument has some merit, but clearly cannot be
universally true, since, if it were always true then
no nation would ever develop
 in reality, scarcity of financial capital in many
poor countries is caused by a lack of incentives
for saving/investment within the country
 Capital flight – the tendency for both human
capital and financial capital to leave developing
countries in search of higher expected rates of
return elsewhere with less risk
 Many wealthy people in developing countries
invest their savings in the U.S. or Europe (richer
countries with more stable political systems)
because doing so offers a higher return and/or
less risk => as a result, these funds are not used
to develop capital at home (in the poor country)
II.
lack of investments in social overhead capital
 many types of infrastructure (e.g., highways, power
generation plants, telecommunications systems) are
most easily built by government
 this requires public funding => many poor countries
struggle with raising taxes to fund such projects
 e.g., many argue that India’s growth has begun to
slow, partly because of its poor rail transport system
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III. difficulties in developing human resources
 poor health outcomes degrade human resources
 2009: 1 million people died of malaria (mostly in
Africa)
 2009: 2 million people died of HIV/AIDS (again,
mostly in Africa)
 brain drain – tendency for talented people from
developing countries to become educated in a
developed country and remain there after graduation
 a talented doctor, engineer, or computer scientist
can earn much more in the U.S. than in a third
world country
 as a result, the most talented workers are often
siphoned off the top of the labor force in a poor
country
IV. corruption
 government plays a key role (either directly or
indirectly) in determining how economic resources
are used, particularly within the context of
developing capital and encouraging innovation
 government corruption can result in a misallocation
of resources (e.g., contracts awarded by bribes as
opposed to by merit; “theft” of resources/profits by
government officials) and prevent growth
 levels of corruption in selected countries (page 142)
 very high: Nigeria
 high: Russia, Indonesia, Pakistan
 moderate: Vietnam, Iran, China, Mexico, Brazil
 low: Thailand, India, Turkey
 very low: U.S., Japan, France, Germany
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Strategies for achieving growth…
A.
IMF and World Bank assist developing countries in
the promotion of stable, market-oriented institutions
 International Monetary Fund – international
agency whose primary goals are to stabilize
international exchange rates and to lend money to
countries that have problems financing their
international transactions
 World Bank – international agency that lends
money to individual countries for projects that
promote economic development
B.
Industrial Policy – a policy in which the government
actively picks industries to support as a base for
economic development
 e.g., Ministry of International Trade and Industry
(MITI) in Japan has overseen industrial policy in
the country since 1949
C.
Import Substitution – a trade strategy which attempts
to develop domestic industries to produce goods to
replace imports
 e.g., policies pursued in the 1960’s and 1970s in
India, Brazil, Egypt, Mexico, and Argentina
D.
Export Promotion – trade strategy which encourages
domestic industries to produce goods for export (to
wealthy consumers in developed countries)
 e.g., policies pursued by Japan in 1960s, Hong
Kong, Singapore, South Korea, & Taiwan in 1970s,
and more recently Brazil, Columbia, & Turkey
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