Slope on logarithmic scale = Rate of Real GDP Growth Growth Slowdown growth rate > growth rate Great Moderation

Long-run economic growth The process by which rising productivity increases the average standard of living. The Growth in Real GDP per Capita, US, 1900–2006 Calculating Growth Rates and the Rule of 70 8-fold increase in 106 years  2% annual growth in real gdp per capita

The Connection between Economic Prosperity and Health Making the Connection

4 of 26 Income and Happiness Happiness and Income per Person across Countries Carol UNLV Nov 11-15

What Determines the Rate of Long-Run Growth in Output per Hour Worked? Capital Manufactured goods that are used to produce other goods and services...Machines, not paper Investment builds Capital Increases in Capital per Hour Worked Technological Change: an increase in the output that can be produced using a given quantity of inputs. Economic growth depends more on technological change than on increases in capital per hour worked. Growth driven by capital accumulation eventually peters out Witness Singapore Witness the former Soviet Union Depreciation and obsolescence catch up to gross investment Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work.

Saving, Investment, and the Financial System Financial system Financial markets and financial intermediaries through which firms acquire funds from households. The Macroeconomics of Saving and Investment Y = C + I + G + NX I = Y − C − G − NX Recall: − NX = Capital Inflows Y – Net Taxes – C = S private Net Taxes – G = S public So: I = S private + S public + Capital Inflows National Saving + Capital Inflows  Capital Accumulation

Average Annual Growth Rates for the World Economy Economic Growth Over Time and Around the World Economic Growth from 1,000,000 B.C. to the Present In the long run, small differences in economic growth rates result in big differences in living standards.

Why Did the Industrial Revolution Begin in England? The Glorious Revolution,1688 Guarantee of property rights  precondition for accumulation It ain’t “culture” Unlike the Spanish in Mexico and South America, the English didn’t find many Indians to enslave in North America Slavery in the British West Indies was every bit like slavery in Spanish, Portuguese and Dutch colonies The English had to give settlers in North America incentives to be productive

GDP per Capita, 2006 Economic Growth Over Time and Around the World “The Rich Get Richer and... ”

What Explains Rapid Economic Growth in Botswana While the Rest of Sub-Saharan Africa Languishes? Diamonds...but also Political stability Protection of property rights Rule of law

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.

The Per-Worker Production Function Output per worker is a decreasing function of capital per worker There are diminishing returns to capital

Which of the following are the two key factors that determine labor productivity? a.Economic growth and real GDP per person. b.The amount of land and capital available in a country. c.Government policies that promote household consumption. d.The quantity of capital per hour worked and the level of technology.

Why Isn’t the Whole World Rich? If poor countries are poor because of little capital per worker, equal increments of capital should be more productive in poor than in rich countries  catch-up and convergence 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.

FIGURE 10-8 Catch-up Among the Industrial Countries Why Isn’t the Whole World Rich? Catch-up: Sometimes, but Not Always

Convergence in Output/Capita? – The OECD

Looking Across Lots of Countries – Convergence ???

Looking Across Countries – A Closer Look Conditional convergence Human capital Geography and resources Institutions: Rule-of-law/property rights/finance

What Determines How Fast Economies Grow? Better machinery and equipment. Increases in human capital. There are three main sources of technological change: 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. Technology - technology - technology

Better machinery and equipment, increases in human capital, and better means of organizing and managing production are the three main sources of: a.Inventions and innovations. b.A higher standard of living. c.Technological change. d.Human capital.

Technological Change Increases Output per Hour Worked What Determines How Fast Economies Grow? Technological Change: The Key to Sustaining Economic Growth

What is the impact of technological change improvements on the per-worker production function? a.As technological improvements occur, the economy moves from one point to another along the per-worker production function. b.Technological improvements shift the per- worker production function up. c.Technological improvement does not affect the per-worker production function. d.Technological improvement may or may not affect the per worker production function depending on how it impacts capital per worker.

What is the name given to the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant? a.The output growth function. b.The capital-labor function. c.The per-worker production function. d.The production possibilities function.

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, % Tunisia2, Brazil2, Algeria3, Argentina7, COUNTRY REAL GDP PER CAPITA IN 1960 (2000 DOLLARS) ANNUAL GROWTH IN REAL GDP PER CAPITA, 1960–2004 Japan$4, % Italy7, France8, United Kingdom10,

Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth? Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Failure to Enforce the Rule of Law 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

Why Isn’t the Whole World Rich? The Benefits of Globalization 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 Openness  technology transfer...if developing country has the human capital to absorb advanced technology Foreign direct investment (FDI) The purchase or building by a corporation of a facility in a foreign country.

Its strategy for raising the standard of living of its citizens was to make continuous increases in the quantity of capital available to its workers. The economic growth model helps us understand the flaws in this policy for achieving economic growth. Using the Economic Growth Model to Analyze the Failure of the Soviet Economy

How does the economic growth model explain why the Soviet Union’s economy failed? a.Because it failed to add new capital to sustain a growing labor force. b.Because it stopped building new factories. c.Because it failed to implement new technologies. d.Because it allowed production to be in the hands of inept entrepreneurs.

Globalization and the Spread of Technology in Bangladesh The spread of technology spurred Bangladesh’s booming clothing industry. Be careful what you wish for.

New Growth Theory (Paul Romer)  Increasing Returns to Knowledge Knowledge feeds back on knowledge Standing on the shoulders of giants Knowledge as public good  positive spillovers Non-rival Non-excludable  free rider problem Let others develop stuff and then copy it  Inventor can’t capture all the value of breakthrough  Less than socially optimal amount of R&D Patent protection helps Calls for public subsidy of R&D and education Government recaptures costs of promoting growth Spillovers and individual productivity Brain drain: individual’s high productivity where productivity is high

Protecting intellectual property with patents and copyrights. Subsidizing research and development. Subsidizing education. What Determines How Fast Economies Grow? Government policy can help increase the accumulation of knowledge capital in three ways: Joseph Schumpeter and Creative Destruction Schumpeter: new products unleash a “gale of creative destruction”  older products and firms are driven out of the market  Progress is driven by entrepreneurs.

Average Annual Growth Rates in Real GDP per Hour Worked in the United States Economic Growth in the United States Economic Growth in the United States since 1950: Fast, Then Slow, Then Fast Again

Was It a Measurement Problem? Was It the Effect of High Oil Prices?  Capital Obsolescence? Was It the Declining Quality of Labor? Was It the Increased Important of Services? Was It Absence of a Break-Through Product? The Productivity Slowdown Affected All Industrial Countries Economic Growth in the United States What Caused the Productivity Slowdown of 1973–1994?

Which of the following are explanations for the productivity slowdown of the mid-1970s to mid- 1990s? a.Measurement problems. b.High oil prices. c.A decline in labor quality. d.All of the above.