chapter
ten
Long-Run Economic Growth:
Sources and Policies
Prepared by: Fernando & Yvonn Quijano
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
1 LEARNING OBJECTIVE
CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Economic Growth Over Time and Around the World
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.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Economic Growth Over Time and Around the World
Small Differences in Growth Rates Are Important
10 - 1
Average Annual Growth Rates for
the World Economy
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
10 - 2
The Benefits of an Earlier Start: Standards
of Living in China and Japan
If rapid economic
growth continues in
China, its standard of
living will begin to
approach those in the
United States and
Japan.
CHINA
JAPAN
Life expectancy at birth
71.5 years
81.9 years
Infant mortality (per 1,000
live births)
30
3
Percentage of the population
surviving on less than $2 per
day
47%
0%
Percentage of the population
with access to treated water
77%
100%
Percentage of the population
with access to improved
sanitation
44%
100%
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Economic Growth Over Time and Around the World
Why Do Growth Rates Matter?
Growth rates matter because an economy that grows
too slowly fails to raise living standards.
“The Rich Get Richer and …”
In the 1980s and 1990s, a small group of countries,
mostly East Asian countries such as South Korea,
Taiwan, and Singapore, experienced high rates of
growth and are sometimes referred to as the newly
industrializing countries.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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2 LEARNING OBJECTIVE
CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
Economic growth model A model that explains
changes in real GDP per capita in 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
and the level of technology.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
Technological change Change in the ability of a firm to
produce a given level of output with a given quantity of inputs
There are three main sources of technological change:
 Better machinery and equipment.
 Increases in human capital.
 Better means of organizing and managing
production.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
Human capital The accumulated
knowledge and skills that workers
acquire from education and training, or
from their life experiences.
The Per-Worker Production Function
Per-worker production function
The relationship between real GDP, or
output, per hour worked and capital per
hour worked, holding the level of
technology constant.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
The Per-Worker Production Function
10 - 3
The Per-Worker Production
Function
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
Which Is More Important for Economic Growth: More Capital or
Technological Change?
Technological Change: The Key to Sustaining Economic Growth
10 - 4
Technological Change Increases
Output per hour worked
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
What Determines How Fast Economies Grow?
Endogenous Growth Theory
Endogenous 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.
Patent The exclusive right to a product for
a period of 20 years from the date the
product was invented.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
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.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Economic Growth in the United States
The Productivity Boom: Are We in a “New Economy”?
10 - 6
The Contribution of Information
Technology to Growth in Real GDP
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
10-2
4 LEARNING OBJECTIVE
The Economic Growth Model’s Predictions of Catch-Up
COUNTRY
REAL GDP PER CAPITA
IN 1960 (1996 DOLLARS)
GROWTH IN REAL GDP
PER CAPITA, 1960-2000
Botswana
$958
5.29%
Thailand
1,091
4.70
Sri Lanka
1,333
2.29
Ecuador
2,003
1.38
Guatemala
2,344
1.29
COUNTRY
Japan
REAL GDP PER CAPITA
IN 1960 (1996 DOLLARS)
GROWTH IN REAL GDP
PER CAPITA, 1960-2000
$4,544
4.32%
Norway
8,240
3.00
The Netherlands
9,245
2.45
United Kingdom
9,674
2.10
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience
Rapid Growth?
There is no one answer, but most economists
point to four key factors:
 Failure to enforce the rule of law
 Wars and revolutions
 Poor public education and health
 Low rates of saving and investment
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries Experience
Rapid Growth?
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 contribute
to a vicious cycle of poverty.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Why Isn’t the Whole World Rich?
The Benefits of Globalization
Foreign direct investment The
purchase or building by a corporation of a
facility in a foreign country.
Foreign portfolio investment The
purchase by an individual or firm of stock
or bonds issued in another country.
Globalization The process of countries
becoming more open to foreign trade and
investment.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 10: Long-run Economic Growth:
Sources and Policies
Catch-up
Economic growth model
Endogenous growth
theory
Foreign direct
investment (FDI)
Foreign portfolio
investment
Globalization
Human capital
Organization Capital
Industrial Revolution
Labor productivity
Patent
Per-worker production
function
Technological change
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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