Slope on logarithmic scale
= Rate of Real GDP Growth
1983 - 2007
Great Moderation
Growth Slowdown
1948-70 growth rate >
1970+ growth rate
Long-run economic growth The process by which rising
productivity increases the average standard of living.
The Growth in Real GDP
per Capita, US, 1900–2006
Calculating Growth Rates and the Rule of 70
Number of years to double 
70
Growth rate
8-fold increase in 106 years
 2% annual growth in real gdp
per capita
Making
the
Connection
The Connection between
Economic Prosperity and Health
Income and Happiness
Carol Graham, @ UNLV Nov 11-15
Happiness and Income per Person across Countries
4 of 26
What Determines the Rate of Long-Run Growth in
Output per Hour Worked?
Labor productivity The quantity of goods and services that can be
produced by one worker or by one hour of work.
• Increases in Capital per Hour Worked
Capital Manufactured goods that are used to produce
other goods and services...Machines, not paper
Investment builds Capital
• Technological Change: an increase in the output that can be
produced using a given quantity of inputs.
Economic growth depends more on technological change than on
increases in capital per hour worked.
Growth driven by capital accumulation eventually peters out
• Witness Singapore
• Witness the former Soviet Union
•
Depreciation and obsolescence catch up to gross investment
Saving, Investment, and the Financial System
Financial system Financial markets and financial intermediaries
through which firms acquire funds from households.
The Macroeconomics of Saving and Investment
Y = C + I + G + NX
I = Y − C − G − NX
Recall:
− NX = Capital Inflows
Y – Net Taxes – C = Sprivate
Net Taxes – G = Spublic
So:
I = Sprivate + Spublic + Capital Inflows
National Saving + Capital Inflows
Capital Accumulation
Economic Growth Over Time and Around the World
Economic Growth from 1,000,000 B.C. to the Present
Average Annual
Growth Rates for
the World Economy
In the long run,
small differences
in economic
growth rates result
in big differences
in living
standards.
Why Did the Industrial Revolution Begin in
England?
• The Glorious Revolution,1688
• Guarantee of property rights
 precondition for accumulation
It ain’t “culture”
• Unlike the Spanish in Mexico and South America, the
English didn’t find many Indians to enslave in North
America
Slavery in the British West Indies was every bit
like slavery in Spanish, Portuguese and Dutch
colonies
• The English had to give settlers in
North America incentives to be productive
Economic Growth Over Time and Around the World
“The Rich Get Richer and . . . ”
GDP per Capita, 2006
What Explains Rapid Economic Growth in Botswana While
the Rest of Sub-Saharan Africa Languishes?
• Diamonds...but also
• Political stability
• Protection of property rights
• Rule of law
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.
The more capital each worker has, the more productive she will
be.
Technological change A change in the quantity of output a firm
can produce using a given quantity of inputs.
The Per-Worker Production Function
• Output per worker is a decreasing function of capital
per worker
• There are diminishing returns to capital
Which of the following are the two key factors that
determine labor productivity?
a. Economic growth and real GDP per person.
b. The amount of land and capital available in a
country.
c. Government policies that promote household
consumption.
d. The quantity of capital per hour worked and
the level of technology.
Why Isn’t the Whole World Rich?
• If poor countries are poor because of little capital per worker,
equal increments of capital should be more productive in poor
than in rich countries  catch-up and convergence
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.
Why Isn’t the Whole World Rich?
Catch-up: Sometimes, but Not Always
Catch-up Among the Industrial Countries
FIGURE 10-8
Convergence in Output/Capita? – The OECD
Looking Across Lots of Countries – Convergence ???
Looking Across Countries – A Closer Look
Conditional convergence
•Human capital
•Geography and resources
•Institutions: Rule-of-law/property rights/finance
What Determines How Fast Economies Grow?
Technology - technology -
technology
There are three main sources of technological change:
• 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.
Better machinery and equipment, increases in
human capital, and better means of organizing
and managing production are the three main
sources of:
a. Inventions and innovations.
b. A higher standard of living.
c. Technological change.
d. Human capital.
What Determines How Fast Economies Grow?
Technological Change:
The Key to Sustaining Economic Growth
Technological Change
Increases Output per
Hour Worked
What is the impact of technological change
improvements on the per-worker production
function?
a. As technological improvements occur, the
economy moves from one point to another
along the per-worker production function.
b. Technological improvements shift the perworker production function up.
c. Technological improvement does not affect
the per-worker production function.
d. Technological improvement may or may not
affect the per worker production function
depending on how it impacts capital per
worker.
What is the name given to the relationship
between real GDP per hour worked and capital
per hour worked, holding the level of technology
constant?
a. The output growth function.
b. The capital-labor function.
c. The per-worker production function.
d. The production possibilities function.
The Economic Growth Model’s Prediction of Catch-up
COUNTRY
REAL GDP
PER CAPITA IN 1960
(2000 DOLLARS)
ANNUAL GROWTH
IN REAL GDP
PER CAPITA, 1960–2004
Taiwan
$1,443
Tunisia
2,102
3.13
Brazil
2,643
2.36
Algeria
3,843
1.04
Argentina
7,838
0.76
COUNTRY
Japan
REAL GDP
PER CAPITA IN 1960
(2000 DOLLARS)
$4,509
6.26%
ANNUAL GROWTH
IN REAL GDP
PER CAPITA, 1960–2004
3.94%
Italy
7,167
2.70
France
8,531
2.58
10,323
2.19
United Kingdom
Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience Rapid Growth?
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.
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.
Poor Public Education and Health
Low Rates of Saving and Investment
Why Isn’t the Whole World Rich?
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
• Openness  technology transfer...if developing country has the
human capital to absorb advanced technology
Using the Economic Growth Model to Analyze the Failure of the Soviet
Economy
Its strategy for raising the standard of living of its citizens was to make continuous increases
in the quantity of capital available to its workers.
The economic growth model helps us understand the flaws in this policy for achieving
economic growth.
How does the economic growth model explain
why the Soviet Union’s economy failed?
a. Because it failed to add new capital to sustain
a growing labor force.
b. Because it stopped building new factories.
c. Because it failed to implement new
technologies.
d. Because it allowed production to be in the
hands of inept entrepreneurs.
Globalization and the Spread
of Technology in Bangladesh
The spread of technology spurred Bangladesh’s booming
clothing industry.
Be careful what you wish for.
New Growth Theory (Paul Romer)
 Increasing Returns to Knowledge
• Knowledge feeds back on knowledge
• Standing on the shoulders of giants
• Knowledge as public good  positive spillovers
• Non-rival
• Non-excludable  free rider problem
• Let others develop stuff and then copy it
 Inventor can’t capture all the value of breakthrough
 Less than socially optimal amount of R&D
• Patent protection helps
• Calls for public subsidy of R&D and education
• Government recaptures costs of promoting growth
• Spillovers and individual productivity
Brain drain: individual’s high productivity where productivity is high
What Determines How Fast Economies Grow?
Government policy can help increase the accumulation of
knowledge capital in three ways:
• Protecting intellectual property with
patents and copyrights.
• Subsidizing research and development.
• Subsidizing
education.
Joseph Schumpeter and Creative Destruction
Schumpeter: new products unleash a “gale of creative
destruction”
 older products and firms are driven out of the market
 Progress is driven by entrepreneurs.
Economic Growth in the United States
Economic Growth in the United States since 1950: Fast, Then
Slow, Then Fast Again
Average Annual Growth Rates in Real
GDP per Hour Worked in the United States
Economic Growth in the United States
What Caused the Productivity Slowdown of 1973–1994?
Was It a Measurement Problem?
Was It the Effect of High Oil Prices?  Capital Obsolescence?
Was It the Declining Quality of Labor?
Was It the Increased Important of Services?
Was It Absence of a Break-Through Product?
The Productivity Slowdown Affected All Industrial Countries
Which of the following are explanations for the
productivity slowdown of the mid-1970s to mid1990s?
a. Measurement problems.
b. High oil prices.
c. A decline in labor quality.
d. All of the above.