Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
What we learned in our last class
Review on supply and demand (graph).
Loanable funds market: How do loanable funds supply and demand
curves shift.
Crowding out effect: Government spending and loanable funds
market.
Business cycle: four phases.
Effects of business cycle: Airline industry, durable goods, interest
rate, inflation rate, unemployment rate.
American economy became more stable:
Services, Government transfer program, Active policy
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MySpace Meets the
Chinese Economic
Miracle
Learning Objectives
10.1 Define economic growth,
calculate economic growth rates,
and describe global trends in
economic growth.
10.2 Use the economic growth model
to explain why growth rates differ
across countries.
10.3 Discuss fluctuations in
productivity growth in the
United States.
10.4 Explain economic catch-up and
discuss why many poor
countries have not experienced
rapid economic growth.
…per capita GDP in
China will double every
eight years.
10.5 Discuss government policies that
foster economic growth.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
Economic Growth Over Time and Around the World
Economic Growth from 1,000,000 B.C. to the Present
FIGURE 10-1
Average Annual
Growth Rates for
the World Economy
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
Economic Growth Over Time and Around the World
Small Differences in Growth Rates Are Important
In the long run, small differences in economic growth rates
result in big differences in living standards.
The process is COMPOUNDING
The value of $100 deposit after 50 years:
with interest rate of 1.3% : $191
with interest rate of 2.3% : $321
Why Do Growth Rates Matter?
Growth rates matter because an
economy that grows too slowly fails
to raise living standards.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
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.
An example:
Real GDP per capital (2000 dollars)
1950:
Argentina:
$6,942
France:
$5,921
Growth rates: Argentina 0.8%, France: 2.8%
2004:
Argentina:
$10,939
France:
$26,168
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
Making The Benefits of an Earlier Start:
the
Connection
Standards of Living in China and Japan
CHINA
Sustained high rates of economic
growth have helped Japan attain
high living standards.
JAPAN
Life expectancy at birth
71.9 years
82.2 years
Infant mortality (per
1,000 live births)
23
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%
Internet users per 1,000
people
73
587
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
Economic Growth Over Time and Around the World
“The Rich Get Richer and . . . ”
FIGURE 10-2
GDP per Capita, 2006
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
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.
Increases in Capital per Hour Worked
Technological change A change in the quantity
of output a firm can produce using a given
quantity of inputs.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
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
Learning Objective 10.2
What Determines How Fast Economies Grow?
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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
The Per-Worker Production Function
FIGURE 10-3
The Per-Worker Production Function
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
Technological Change:
The Key to Sustaining Economic Growth
FIGURE 10-4
Technological Change
Increases Output per
Hour Worked
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Learning Objective 10.2
Chapter 10: Long-Run Economic Growth: Sources and Policies
Making
the
Connection
Why Did the Soviet Union’s
Economy Fail?
The fall of the Berlin Wall
in 1989 symbolized the
failure of Communism.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
Solved Problem
10-2
Using the Economic Growth Model to Analyze
the Failure of the Soviet Union’s Economy
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
New Growth Theory
New growth theory A model of long-run
economic growth which emphasizes that
technological change is influenced by
economic incentives and so is determined
by the working of the market system.
Key determinant: Knowledge capital
Physical capital: diminishing return
Knowledge capital: increasing return at
the level of the economy!!
Free ride: Transistor technology
developed by Bell laboratory in 1950
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.2
What Determines How Fast Economies Grow?
New Growth Theory
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 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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
What we learned in our last class
The world economy grew much faster in last century than before.
Small difference in growth rates matters a lot!
Compounding process.
France vs. Argentina
Gap between rich and poor countries exists
What determines the speed of economic growth?
Growth model
Technological change and capital per hour worked
Main sources of technological change
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.1
What we learned in our last class
Technological change is more important than captial per hour
worked
Per-worker production function
The key to sustain economic growth
an example: Soviet Union
New growth theory
Knowledge capital is crucial to technological change
Knowledge capital is influenced and determined by
market system
Government can do something to help increase
knowledge capital !!
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.3
Economic Growth in the United States
Economic Growth in the United States since 1950: Fast, Then
Slow, Then Fast Again
FIGURE 10-5
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
Learning Objective 10.3
Economic Growth in the United States
What Caused the Productivity Slowdown of 1973–1994?
• Measurement problems
• High oil prices
• A decline in labor quality
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
Learning Objective 10.3
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
Learning Objective 10.4
Why Isn’t the Whole World Rich?
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.
Intuition: Diminishing return
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.4
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
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.4
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
Learning Objective 10.4
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
Learning Objective 10.4
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
Learning Objective 10.4
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.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.4
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
Learning Objective 10.4
Why Isn’t the Whole World Rich?
Why Don’t More Low-Income Countries
Experience Rapid Growth?
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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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.4
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.
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Chapter 10: Long-Run Economic Growth: Sources and Policies
Learning Objective 10.4
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
Learning Objective 10.4
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
Learning Objective 10.5
Growth 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 with Respect to Technology
Policies with Respect to Saving and Investment
Is Economic Growth Good or Bad?
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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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