Chapter 9 Global Economic Growth and Development.
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Transcript of Chapter 9 Global Economic Growth and Development.
Chapter 9
Global Economic Growth and Development
9-2
Learning Objectives
• Define economic growth
• Recognize the importance of economic growth rates
• Explain why productivity increases are crucial for maintaining economic growth
9-3
Learning Objectives (cont'd)
• Describe the fundamental determinants of economic growth
• Understand the basis of new growth theory
• Discuss the fundamental factors that contribute to a nation’s economic development
9-4
How Do We Define Economic Growth?
• Economic growth can be shown graphically by shifting the production possibilities curve outward.
• Economic growth reflects the fact that more of all goods can be produced within the economy.
9-5
Figure 9-1 Economic Growth
Distance of shiftrepresents an increasein productive capacity
9-6
How Do We Define Economic Growth? (cont'd)
• Economic Growth
– Increase in per capita real GDP measured by its rate of change per year
9-7
Figure 9-2 The Historical Record of U.S. Economic Growth
Source: U.S. Department of Commerce.
9-8
International Example: Growth Rates Around the World
• Table 9-1 shows the average annual rate of growth of real GDP per person in selected countries since 1990.
• Even though the U.S. is one of the world’s richest countries, our rate of economic growth in recent decades has been in the mid-range.
• U.S. per capita real GDP has remained higher than other nations because we have been able to sustain growth over many decades.
9-9
Table 9-1 Per Capita Real GDP Growth Rates in Various Countries
9-10
How Do We Define Economic Growth? (cont'd)
• Question
– If your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off?
9-11
How Do We Define Economic Growth? (cont'd)
• Is economic growth bad?
– Some psychologists contend that growth makes us worse off.
– As with all activities there are costs along with benefits to growth.
9-12
Table 9-2 Costs and Benefits of Economic Growth
9-13
How Do We Define Economic Growth? (cont'd)
• The importance of growth rates
– Do we need to worry about small differences in the economic growth rate?
9-14
Table 9-3 One Dollar Compounded Annually at Different Interest Rates
9-15
Economic growth = Rate of growth of capital + Rate of growth of labor +Rate of growth in the productivityof capital and of labor
Productivity Increases: The Heart of Economic Growth
9-16
Productivity Increases: The Heart of Economic Growth (cont'd)
• Labor Productivity
– Total real domestic output (real GDP) divided by the number of workers (output per worker)
9-17
Source: International Monetary Fund.
Figure 9-3 Factors Accounting for Economic Growth in Selected Regions
9-18
Example: Explaining the U.S. Lead in Labor Productivity Growth
• During the past decade, labor productivity has increased by about 9% in nations in the European Monetary Union, 13% in Japan, 18% in the United Kingdom, and more than 27% in the United States.
• One explanation is that U.S. firms face fewer legal restrictions on opening and closing operations and hiring and firing workers.
• Second, U.S. producers face more competition, which forces them to be more efficient.
• Third, lower tax rates give U.S. workers greater incentives to direct more time to developing skills on the job.
9-19
Saving: A Fundamental Determinant of Economic Growth
• To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.
9-20Source: World Bank.
Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP
9-21
New Growth Theory and the Determinants of Growth
• New Growth Theory
– A theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact
9-22
New Growth Theory and the Determinants of Growth (cont'd)
• Technology: a separate factor of production
– The greater the rewards, the more technological advances we will get.
9-23
New Growth Theory and the Determinants of Growth (cont'd)
• Research and development (R&D)
– Patents• A government protection that gives an inventor the
exclusive right to make, use, or sell an invention for a limited period of time (currently, 20 years)
9-24
New Growth Theory and the Determinants of Growth (cont'd)
• Research and development (R&D)
– Positive externalities and R&D• For every 1% rise in the stock of R&D in the United
States alone, productivity worldwide increases by about 0.25%.
9-25
New Growth Theory and the Determinants of Growth (cont'd)
• The open economy and economic growth
– Free trade encourages the spread of technology.
9-26
Source: U.S. Patent and Trademark Office.
Figure 9-5 U.S. Patent Grants
9-27
New Growth Theory and the Determinants of Growth (cont'd)
• Innovation
– Transforming an invention into something that is useful to humans
– New growth theorists believe that real wealth creation comes from innovation – and invention is a facet of innovation
9-28
New Growth Theory and the Determinants of Growth (cont'd)
• The importance of ideas and knowledge
– Knowledge, ideas, and productivity are related; ideas are what drive economic growth.
– Economist Paul Romer suggests that growth can continue as long as we come up with new ideas.
9-29
New Growth Theory and the Determinants of Growth (cont'd)
• The importance of human capital
– Knowledge, ideas and, productivity are all tied together.
– Human capital consists of knowledge people acquire.
– Investing in human capital raises living standards.
9-30
Immigration, Property Rights, and Growth
• Population and immigration as they affect economic growth– MIT economist Michael Kremer believes
population growth drives technological progress.
9-31
Immigration, Property Rights, and Growth (cont'd)
• Question– How can well-defined property rights stimulate
economic growth?
• Answers– The more certain property rights are, the more
capital accumulation there will be.
– The more certain are property rights, the more entrepreneurship there will be.
9-32
Economic Development
• Question
– How did developed countries travel paths of growth from extreme poverty to relative riches?
9-33
Economic Development (cont'd)
• Development Economics
– The study of factors that contribute to the economic growth of a country
• The goal of development economists is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones.
9-34
Economic Development (cont'd)
• Putting world poverty into perspective
– At least one-half of the world’s population lives at subsistence level.
– 20% of the world lives on less than $1.50 per day.
– The U.S. poverty level exceeds the average income of one-half the world.
9-35
Economic Development (cont'd)
• Relationship between population growth and economic development
– There are nearly 7 billion people on earth.
– By 2050, according to the U.N., world population will be close to 9.1 billion.
– Growth will occur mainly in developing nations.
9-36
Figure 9-7 Expected Growth in World Population by 2050, Panel (a)
Source: United Nations.
9-37
Figure 9-7 Expected Growth in World Population by 2050, Panel (b)
Source: United Nations.
9-38
Economic Development (cont'd)
• The relationship between population growth and economic development
– Growth leads to smaller families.
– The more economic development occurs, the slower the population growth rate.
– Birth rates decline with modernization.• Reduced infant mortality• People do not rely on children to take care of them in
old age
9-39
Economic Development (cont'd)
• The stages of development
– Agricultural stage
– Manufacturing stage
– Services stage
9-40
Economic Development (cont'd)
• Keys to economic development
– Establishing a system of property rights
– Developing an educated population
– Letting “creative destruction” run its course
– Limiting protectionism
9-41
Summary Discussion of Learning Objectives
• Economic growth– The rate of economic growth is the annual rate of
change in per capita GDP.
• Why economic growth rates are important– Over long intervals, relatively small differences in
the economic growth rate can produce large disparities in per capita incomes.
9-42
Summary Discussion of Learning Objectives (cont'd)
• Why productivity increases are crucial for maintaining economic growth
– For a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion.
9-43
Summary Discussion of Learning Objectives (cont'd)
• The key determinants of economic growth – Increases in the labor force, the growth of capital, and the
growth of productivity– Higher saving rates contribute to greater investment and
increased capital accumulation and growth
• New growth theory – Emphasizes how rewards to innovation contribute to
higher growth rates– Ideas and knowledge are crucial elements
9-44
Summary Discussion of Learning Objectives (cont'd)
• Fundamental factors that contribute to a nation’s economic development
– Nations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of economic development.