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Chapter 10: Long-Run Economic Growth: Sources and Policies
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Chapter 10: Long-Run Economic Growth: Sources and Policies
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Chapter 10: Long-Run Economic Growth: Sources and Policies
CHAPTER
10
Long-Run Economic
Growth: Sources and
Policies
Google’s 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.
Prepared by:
Fernando Quijano
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Chapter 10: Long-Run Economic Growth: Sources and Policies
CHAPTER
10
Long-Run Economic
Growth: Sources and
Policies
Chapter Outline and
Learning Objectives
10.1 Economic Growth over Time and around
the World
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
10.2 What Determines How Fast Economies
Grow?
Use the economic growth model to
explain why growth rates differ across
countries.
10.3 Economic Growth in the United States
Discuss fluctuations in productivity
growth in the United States.
10.4 Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
10.5 Growth Policies
Discuss government policies that foster
economic growth.
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Economic Growth over Time and
around the World
10.1 LEARNING OBJECTIVE
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Economic Growth from 1,000,000 B.C. to the Present
Industrial Revolution The application of
mechanical power to the production of
goods, beginning in England around 1750.
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10.1 LEARNING OBJECTIVE
Making
the Why Did the Industrial
Revolution Begin in England?
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Connection
Most economists accept the idea that
economic growth is not likely to occur
unless a country’s government provides
the necessary type of institutional
framework.
The British government’s
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.
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Economic Growth over Time
and around the World
10.1 LEARNING OBJECTIVE
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Economic Growth from 1,000,000 B.C. to the Present
Chapter 10: Long-Run Economic Growth: Sources and Policies
FIGURE 10-1
Average Annual Growth
Rates for the World
Economy
World economic growth was
essentially zero in the years
before 1300, and it was very
slow—an average of only 0.2
percent per year—before 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.
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Economic Growth over Time
and around the World
10.1 LEARNING OBJECTIVE
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Small Differences in Growth Rates Are Important
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
YOUR TURN: Test your understanding by doing related problem 1.6 at the end of
this chapter.
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10.1 LEARNING OBJECTIVE
Making The Benefits of an Earlier
the
Connection
Start: Standards of Living
in China and Japan
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
CHINA
Although China has experienced
rapid economic growth, its living
standards are still well below those
of Japan.
JAPAN
Life expectancy at birth
73.5 years
82.1 years
Infant mortality (per 1,000
live births
20.3
2.8
Percentage of the
population surviving on
less than $2 per day
35%
0%
Percentage of the
population with access
to improved water source
77%
100%
Percentage of the
population with access
to improved sanitation
44%
100%
Internet users per 1,000
people
85
668
YOUR TURN: Test your understanding by doing related problem 1.7 at the end of
this chapter.
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Economic Growth over Time
and around the World
10.1 LEARNING OBJECTIVE
Define economic growth, calculate
economic growth rates, and describe
global trends in economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
“The Rich Get Richer and . . . ”
FIGURE 10-2
GDP per Capita, 2008
GDP per capita is measured in U.S. dollars, corrected for differences across countries in the cost
of living.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
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?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
There are three main sources of technological
change:
Chapter 10: Long-Run Economic Growth: Sources and Policies
• Better machinery and equipment.
• Increases in human capital.
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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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
The 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.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
The Per-Worker Production Function
FIGURE 10-3
Chapter 10: Long-Run Economic Growth: Sources and Policies
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.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Which Is More Important for Economic Growth:
More Capital or Technological Change?
Technological change helps
economies avoid diminishing
returns to capital.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Technological Change:
The Key to Sustaining Economic Growth
Chapter 10: Long-Run Economic Growth: Sources and Policies
FIGURE 10-4
Technological Change
Increases Output per
Hour Worked
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.
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10.2 LEARNING OBJECTIVE
Making
the What Explains the Economic
Failure of the Soviet Union?
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Connection
A centrally planned economy, such as the
Soviet Union’s, 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.
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.
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Solved Problem
10-2
Chapter 10: Long-Run Economic Growth: Sources and Policies
Using the Economic Growth Model to Analyze
the Failure of the Soviet Union’s Economy
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
YOUR TURN: For more practice, do related problems 2.7 and 2.8 at the end of
this chapter.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
New Growth Theory
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.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
New Growth Theory
Chapter 10: Long-Run Economic Growth: Sources and Policies
Government policy can help increase the accumulation of
knowledge capital in three ways:
• 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.
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What Determines How Fast
Economies Grow?
10.2 LEARNING OBJECTIVE
Use the economic growth model to
explain why growth rates differ
across countries.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Joseph Schumpeter and Creative Destruction
Schumpeter developed a model of
growth that emphasized his view that
new products unleash a “gale of creative
destruction” that drives older products—
and, often, the firms that produced
them—out of the market.
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10.3 LEARNING OBJECTIVE
Economic Growth in the United States
Discuss fluctuations in productivity
growth in the United States.
Economic Growth in the United States since 1950
FIGURE 10-5
Chapter 10: Long-Run Economic Growth: Sources and Policies
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 mid1970s. Then, for more than 20 years,
growth slowed before increasing
again in the mid-1990s.
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10.3 LEARNING OBJECTIVE
Economic Growth in the United States
Discuss fluctuations in productivity
growth in the United States.
Economic Growth in the United States since 1950
What Caused the Productivity Slowdown of 1973–1994?
Chapter 10: Long-Run Economic Growth: Sources and Policies
• Measurement problems
• High oil prices
• Deterioration in the U.S. educational system
Has 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.
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10.3 LEARNING OBJECTIVE
Economic Growth in the United States
Discuss fluctuations in productivity
growth in the United States.
Productivity Growth in the
High-Income Economies, 1995-2008
Chapter 10: Long-Run Economic Growth: Sources and Policies
FIGURE 10-6
Productivity Growth in the
Leading Industrial
Economies, 1996–2008
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.
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10.4 LEARNING OBJECTIVE
Chapter 10: Long-Run Economic Growth: Sources and Policies
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
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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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Catch-up: Sometimes, but Not Always
FIGURE 10-7
Chapter 10: Long-Run Economic Growth: Sources and Policies
The Catch-up Predicted by
the Economic Growth Model
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).
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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Catch-up: Sometimes, but Not Always
Catch-up among High-Income Countries
Chapter 10: Long-Run Economic Growth: Sources and Policies
FIGURE 10-8
There Has Been Catchup among High-income
Countries
Looking 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.
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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Catch-up: Sometimes, but Not Always
Are the Developing Countries Catching Up to the
High-income Countries?
Chapter 10: Long-Run Economic Growth: Sources and Policies
FIGURE 10-9
Most of the World Hasn’t
Been Catching Up
Looking 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.
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10.4 LEARNING OBJECTIVE
10-4
Solved Problem
The Economic Growth Model’s
Prediction of Catch-up
Chapter 10: Long-Run Economic Growth: Sources and Policies
COUNTRY
REAL GDP
PER CAPITA IN 1960
(2000 DOLLARS)
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
ANNUAL GROWTH
IN REAL GDP
PER CAPITA, 1960–2008
Taiwan
$1,443
6.01%
Tunisia
2,102
3.14
Brazil
2,643
2.37
Algeria
3,843
1.05
Japan
4,509
3.73
Italy
7,167
2.47
Venezuela
7,838
0.82
United Kingdom
10,323
2.14
New Zealand
12,063
1.41
YOUR TURN: For more practice, do related problems 4.4 and 4.5 at the end of
this chapter.
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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Why Don’t More Low-Income Countries
Experience Rapid Growth?
Chapter 10: Long-Run Economic Growth: Sources and Policies
Failure to Enforce the Rule of Law
Property rights The rights individuals
or firms have to the exclusive use of
their property, including the right to buy
or sell it.
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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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Why Don’t More Low-Income Countries
Experience Rapid Growth?
Chapter 10: Long-Run Economic Growth: Sources and Policies
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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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Why Don’t More Low-Income Countries
Experience Rapid Growth?
Chapter 10: Long-Run Economic Growth: Sources and Policies
Poor Public Education and Health
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.
Low Rates of Saving and Investment
The low savings rates in developing countries can
contribute to a vicious cycle of poverty.
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10.4 LEARNING OBJECTIVE
Making What Do Parking Tickets in New
the
Chapter 10: Long-Run Economic Growth: Sources and Policies
Connection
York City Have to Do With
Poverty in the Developing World?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
YOUR TURN: Test your understanding by doing related problem 4.7 at the end of
this chapter.
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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
The Benefits of Globalization
Foreign direct investment (FDI)
The purchase or building by a
corporation of a facility in a foreign
country.
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.
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10.4 LEARNING OBJECTIVE
Why Isn’t the Whole World Rich?
Explain economic catch-up and discuss
why many poor countries have not
experienced rapid economic growth.
The Benefits of Globalization
FIGURE 10-10
Chapter 10: Long-Run Economic Growth: Sources and Policies
Globalization and Growth
Developing countries that were
more open to foreign trade and
investment grew much faster
during the 1990s than developing
countries that were less open.
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10.5 LEARNING OBJECTIVE
Growth Policies
Discuss government policies
that foster economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
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.
• Enhancing Property Rights and the Rule of Law
• Improving Health and Education
• Policies that Promote Technological Change
• Policies that Promote Saving and Investment
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10.5 LEARNING OBJECTIVE
Growth Policies
Discuss government policies
that foster economic growth.
Chapter 10: Long-Run Economic Growth: Sources and Policies
Is Economic Growth Good or Bad?
As 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.”
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AN INSIDE
LOOK
>> Investment Spurs China’s Growth
Chapter 10: Long-Run Economic Growth: Sources and Policies
China Officials: Long Live Investment
Continuous increases in capital per hour worked lead to smaller and
smaller increases in output per hour worked.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
KEY TERMS
Catch-up
Labor productivity
Economic growth model
New growth theory
Foreign direct investment (FDI)
Patent
Foreign portfolio investment
Per-worker production function
Globalization
Property rights
Human capital
Rule of law
Industrial Revolution
Technological change
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