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
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.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Making
the
Connection
Why Did the Industrial Revolution
Begin in England?
Industrial Revolution The
application of mechanical power
to the production of goods,
beginning in England around
1750.
The British government’s
guarantee of property
rights set the stage for
the Industrial Revolution.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Economic Growth Over Time and Around the World
“The Rich Get Richer and . . . ”
GDP per Capita, 2006
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Chapter 10: Long-Run Economic Growth: Sources and Policies
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.
Technological change helps
economies avoid diminishing
returns to capital.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
What Determines How Fast Economies Grow?
The Per-Worker Production Function
The Per-Worker Production Function
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Why Isn’t the Whole World Rich?
Catch-up: Sometimes, but Not Always
FIGURE 10-7
The Catch-up Predicted by
the Economic Growth Model
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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Why Isn’t the Whole World Rich?
Catch-up: Sometimes, but Not Always
Catch-up Among the Industrial Countries
FIGURE 10-8
There Has Been Catch-up
among Industrial Countries
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Convergence in Output/Capita? – The OECD
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Looking Across Lots of Countries – Convergence ???
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Looking Across Countries – A Closer Look
Conditional convergence
•Human capital
•Geography and resources
•Institutions: Rule-of-law/property rights/finance
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Chapter 10: Long-Run Economic Growth: Sources and Policies
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.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
What Determines How Fast Economies Grow?
Technological Change:
The Key to Sustaining Economic Growth
Technological Change
Increases Output per
Hour Worked
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Using the Economic Growth Model to Analyze
the Failure of the Soviet Union’s Economy
Stalinist growth: Continually increase
saving rate
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Why Isn’t the Whole World Rich?
Catch-up: Sometimes, but Not Always
Are the Developing Countries Catching Up to the Industrial
Countries?
FIGURE 10-9
Most of the World Hasn’t
Been Catching Up
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Solved Problem
10-4
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
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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?
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
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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?
Failure to Enforce the Rule of Law
FIGURE 10-10
The Rule of Law and Growth
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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 (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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Why Isn’t the Whole World Rich?
The Benefits of Globalization
FIGURE 10-11
Globalization and Growth
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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.
Joseph Schumpeter and Creative Destruction
Schumpeter: new products unleash a
“gale of creative destruction”  older
products and firms are driven out of the
market.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
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
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Chapter 10: Long-Run Economic Growth: Sources and Policies
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?
Was It the Declining Quality of Labor?
The Productivity Slowdown Affected All Industrial
Countries
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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”?
Why Has Productivity Growth Been Faster in the
United States than in Other Countries?
FIGURE 10-6
Productivity Growth in the
Leading Industrial
Economies, 1996–2006
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Chapter 10: Long-Run Economic Growth: Sources and Policies
An Inside LOOK
Entrepreneurship and Sustained
Economic Growth in Europe
Feeling Brighter
Figure 1. To increase output per worker during the
aftermath of World War II, Europe increased capital
per worker.
Figure 2. To increase output per worker today,
Europe must find new and innovative ways to
produce.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Making
the
Connection
Globalization and the Spread
of Technology in Bangladesh
The spread of technology spurred Bangladesh’s booming
clothing industry.
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