Macroeconomics
ECON 2301
Spring 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 9
Announcement
 I’m sorry to have to inform you that we
must postpone the 2nd exam till March 31.
 I will be out of town March 26. During our
regular class time that day, please work on
your projects.
Chapter 9: Global Economic Growth &
Development
Learning Objectives
1. Define economic growth
2. Recognize the importance of economic growth rates
3. Explain why productivity increases are crucial for
maintaining economic growth
4. Describe the fundamental determinants of economic
growth
5. Understand the basis of new growth theory
6. Discuss the fundamental factors that contribute to a
nation’s economic development
9-4
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?
9-5
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.
9-6
Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity
9-7
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.
9-8
How Do We Define
Economic Growth? (cont'd)
 Economic Growth
Increase in per capita real GDP measured by its
rate of change per year
9-9
Figure 9-2 The Historical Record
of U.S. Economic Growth
9-10
Table 9-1 Per Capita Real GDP
Growth Rates in Various Countries
9-11
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?
 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
9-12
Table 9-2 Costs and Benefits
of Economic Growth
9-13
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?
9-14
Table 9-3 One Dollar Compounded
Annually at Different Interest Rates
9-15
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
9-16
5%
$11.5
trillion
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
Labor Productivity
Total real domestic output (real GDP) divided by the
number of workers (output per worker)
9-17
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
9-18
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%.
9-19
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.
9-20
Figure 9-4 Relationship Between Rate
of Saving and Per Capita Real GDP
Source: World Bank
9-21
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
 Technology: a separate factor of production
The greater the rewards, the more technological
advances we will get.
9-22
New Growth Theory and What Determines
Growth (cont'd)
 Research and development (R&D)
Patent 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)
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%.
9-23
Figure 9-5 U.S. Patent Grants
Source: World Bank
9-24
New Growth Theory and
What Determines Growth (cont'd)
 Innovation
Transforming an invention into something that
is useful to humans
 The open economy and economic growth
Free trade encourages the spread of technology.
9-25
Figure 9-6 The Relationship Between Economic
Growth and Tariff Barriers to International Trade
9-26
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.
9-27
Figure 9-7 The Winnowing Process
of Research and Development
9-28
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.
9-29
Immigration, Property Rights &
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?
9-30
Immigration, Property Rights & 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.
9-31
Economic Development
 Question
How did developed countries travel paths of growth
from extreme poverty to relative riches?
 Development Economics
The study of factors that contribute to the economic
growth of a country
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.
9-32
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 1/2 the world.
9-33
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.
9-34
Figure 9-8 Expected Growth in World
Population by 2050, Panel (a)
9-35
Figure 9-8 Expected Growth in World
Population by 2050, Panel (b)
9-36
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
9-37
Economic Development (cont'd)
 The stages of development
Agricultural stage
Manufacturing stage
Services stage
 Keys to economic development
Establishing a system of property rights
Developing an educated population
Letting “creative destruction” run its course
Limiting protectionism
9-38
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 “braingain.”
9-39
Figure 9-9 Nations with the Largest
Percentage Emigrations of Skilled Workers
9-40
Summary of Learning Objectives
1. Economic growth: The rate of economic growth is the
annual rate of change in per capita GDP.
2. 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.
3. 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.
9-41
Summary of Learning Objectives (cont'd)
4. The key determinants of economic growth:
Increases in the labor force, the growth of capital, and the
growth of productivity
5. New growth theory: Emphasizes how rewards to
innovation contribute to higher growth rates
6. 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.
9-42
Assignment to be completed before
class March 24:
Study Chapters 6-9, remembering to
attempt to answer the assigned endof-chapter questions.
Be prepared to ask questions during
the review session.