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Transcript of 7 7 Economic Growth: Theory and Policy Once one starts to think about... [differences in growth...
7
Economic Growth:Theory and Policy
Once one starts to think about . . . [differences in growth rates across countries], it is hard to think
about anything else.ROBERT E. LUCAS, 1995 NOBEL PRIZE WINNER IN ECONOMICS
● The Three Pillars of Productivity Growth
● Levels, Growth Rates, and the Convergence Hypothesis
● Growth Policy: Encouraging Capital Formation
● Growth Policy: Improving Education and Training
● The Three Pillars of Productivity Growth
● Levels, Growth Rates, and the Convergence Hypothesis
● Growth Policy: Encouraging Capital Formation
● Growth Policy: Improving Education and Training
ContentsContents
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
● Growth Policy: Spurring Technological Change
● The Productivity Slowdown and Speed-Up in the United States
● Growth in Developing Countries
● From the Long-Run to the Short-Run
● Growth Policy: Spurring Technological Change
● The Productivity Slowdown and Speed-Up in the United States
● Growth in Developing Countries
● From the Long-Run to the Short-Run
ContentsContents
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Three Pillars of Productivity GrowthThe Three Pillars of Productivity Growth
● Capital♦ For a given technology and labor force, labor
productivity will be higher when the capital stock is larger.
● Capital♦ For a given technology and labor force, labor
productivity will be higher when the capital stock is larger.
FIGURE 1: Production FunctionsFIGURE 1: Production Functions
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
K3
K2
K1
c
Hours of Labor Input
b
a
L1 0
Ya
Yb
Ou
tpu
t
Yc
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Three Pillars of Productivity GrowthThe Three Pillars of Productivity Growth
● Technology♦ For given inputs of labor and capital, labor
productivity will be higher when technology is better.
● Technology♦ For given inputs of labor and capital, labor
productivity will be higher when technology is better.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Three Pillars of Productivity GrowthThe Three Pillars of Productivity Growth
● Labor Quality: Education and Training♦ Human Capital = The amount of skill
embedded in the workforce. Measured by amounts of education and training.
♦ For a given capital stock and given technology, labor productivity will be higher when the workforce has more education and training.
● Labor Quality: Education and Training♦ Human Capital = The amount of skill
embedded in the workforce. Measured by amounts of education and training.
♦ For a given capital stock and given technology, labor productivity will be higher when the workforce has more education and training.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Rate of increase of capital, technology, and workforce size and quality directly related to rate of productivity growth.
● Convergence hypothesis: The productivity growth rates of poorer countries tend to be higher than those of richer countries.
● Rate of increase of capital, technology, and workforce size and quality directly related to rate of productivity growth.
● Convergence hypothesis: The productivity growth rates of poorer countries tend to be higher than those of richer countries.
Levels, Growth Rates, and the Convergence HypothesisLevels, Growth Rates, and the Convergence Hypothesis
Figure 2: Productivity Levels and Growth Rates
Figure 2: Productivity Levels and Growth Rates
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Poorer country
Richer country
Rea
l G
DP
per
Cap
ita
Time
$10,000
$2,000
TABLE 1: Productivity Levels & Growth in Selected Countries
TABLE 1: Productivity Levels & Growth in Selected Countries
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Capital Formation = Forming new capital. Synonymous with investment.
● Investment = The flow of resources into the production of new capital.
● Capital Formation = Forming new capital. Synonymous with investment.
● Investment = The flow of resources into the production of new capital.
Growth Policy: Encouraging Capital FormationGrowth Policy: Encouraging Capital Formation
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Investment is encouraged by♦ Lower interest rates
♦ Changes to tax laws
♦ Technological advances
♦ Higher demand
♦ Greater political stability and respect for property rights
● Investment is encouraged by♦ Lower interest rates
♦ Changes to tax laws
♦ Technological advances
♦ Higher demand
♦ Greater political stability and respect for property rights
Growth Policy: Encouraging Capital FormationGrowth Policy: Encouraging Capital Formation
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Growth Policy: Improving Education and TrainingGrowth Policy: Improving Education and Training
● More-educated, better-trained workers are more productive and earn higher wages.
● Education and training enhance productivity.
● More-educated, better-trained workers are more productive and earn higher wages.
● Education and training enhance productivity.
FIGURE 4: Wage Premium for College Graduates
FIGURE 4: Wage Premium for College Graduates
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Per
cen
tag
e W
ag
e A
dva
nta
ge
Males
Females
Year 1985 2004 1995 1990 1980
20
30
40
1975 1973
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Technological advance spurred by♦ More education
♦ More capital formation
♦ Research and development
● Technological advance spurred by♦ More education
♦ More capital formation
♦ Research and development
Growth Policy: Spurring Technological ChangeGrowth Policy: Spurring Technological Change
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown and Speed-Up in the U.S.The Productivity Slowdown and Speed-Up in the U.S.
● The Productivity Slowdown, 1973-1995♦ Growth rate of productivity declined sharply
from the early 1970s through the mid 1990s.
● The Productivity Slowdown, 1973-1995♦ Growth rate of productivity declined sharply
from the early 1970s through the mid 1990s.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown and Speed-Up in the U.S.The Productivity Slowdown and Speed-Up in the U.S.
♦ Explanations include:■Lagging investment; BUT statistics show that
investment as a percentage of GDP stayed constant during this period.
■High Energy Prices; BUT energy prices fell sharply in mid-1980s while productivity growth failed to rise.
♦ Explanations include:■Lagging investment; BUT statistics show that
investment as a percentage of GDP stayed constant during this period.
■High Energy Prices; BUT energy prices fell sharply in mid-1980s while productivity growth failed to rise.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Productivity Slowdown and Speed-Up in the U.S.The Productivity Slowdown and Speed-Up in the U.S.
♦ Explanations include:■Inadequate workforce skills; BUT standard
measures of educational attainment and quality continued to rise.
■Technological slowdown; BUT technological advance may have merely slowed relative to the “golden age” of the ’50s and ’60s before reviving in the computer era.
♦ Explanations include:■Inadequate workforce skills; BUT standard
measures of educational attainment and quality continued to rise.
■Technological slowdown; BUT technological advance may have merely slowed relative to the “golden age” of the ’50s and ’60s before reviving in the computer era.
FIGURE 5: Average Productivity Growth Rates in the U.S.
FIGURE 5: Average Productivity Growth Rates in the U.S.
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
1948–1973 1973–1995 1995–2004
Per
cent
per
Yea
r
2.8
1.4
3.0
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● The Productivity Speed-Up, 1995-??♦ Productivity growth started speeding up around
1995, rising from 1.4% to about 2.5% per year.
♦ Higher productivity growth likely caused by:■Surging investment■Falling energy prices■Advances in information technology
● The Productivity Speed-Up, 1995-??♦ Productivity growth started speeding up around
1995, rising from 1.4% to about 2.5% per year.
♦ Higher productivity growth likely caused by:■Surging investment■Falling energy prices■Advances in information technology
The Productivity Slowdown and Speed-Up in the U.S.The Productivity Slowdown and Speed-Up in the U.S.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Three Pillars Revisited♦ Capital
■Low capital endowments and challenges to accumulating capital
■Development assistance
● Three Pillars Revisited♦ Capital
■Low capital endowments and challenges to accumulating capital
■Development assistance
Growth in the Developing CountriesGrowth in the Developing Countries
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Three Pillars Revisited♦ Technology
■Lack the expertise to adopt existing technology in rich countries
■Foreign direct investment by multinational corporations
● Three Pillars Revisited♦ Technology
■Lack the expertise to adopt existing technology in rich countries
■Foreign direct investment by multinational corporations
Growth in the Developing CountriesGrowth in the Developing Countries
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Three Pillars Revisited♦ Education and training
■Dramatic differences across industrialized versus developing countries
■Promotion of primary education
● Three Pillars Revisited♦ Education and training
■Dramatic differences across industrialized versus developing countries
■Promotion of primary education
Growth in the Developing CountriesGrowth in the Developing Countries
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
TABLE 4: Average Years of Schooling for Selected Countries
TABLE 4: Average Years of Schooling for Selected Countries
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Some Special Problems of the Developing Countries♦ Geography – poor climate for agriculture
♦ Health – tropical diseases and epidemics
♦ Governance – political instability and lack of property rights
● Some Special Problems of the Developing Countries♦ Geography – poor climate for agriculture
♦ Health – tropical diseases and epidemics
♦ Governance – political instability and lack of property rights
Growth in the Developing CountriesGrowth in the Developing Countries
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Long run♦ Growth rates of actual and potential GDP
match up
● Short run♦ Economic fluctuations in actual GDP above
and below potential GDP
♦ Recession = when actual GDP shrinks
● Long run♦ Growth rates of actual and potential GDP
match up
● Short run♦ Economic fluctuations in actual GDP above
and below potential GDP
♦ Recession = when actual GDP shrinks
From the Long Run to the Short RunFrom the Long Run to the Short Run