Global Economic Growth and Development Chapter 9 Global Economic Growth and Development

Introduction The Chinese government had issued relatively few patents until the mid-2000s. Since then, Chinese firms have obtained thousand of patents. Some economists suggest that those patents will help China sustain the solid economic performance it has experienced in recent years. In this chapter, you will learn about how the use of patents could contribute to a nation’s economic performance.

Learning Objectives Define economic growth Recognize the importance of economic growth rates Explain why productivity increases are crucial for maintaining economic growth

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

Chapter Outline How Do We Define Economic Growth? Productivity Increases: The Heart of Economic Growth Saving: A Fundamental Determinant of Economic Growth New Growth Theory and the Determinants of Growth Immigration, Property Rights, and Growth Economic Development

Did You Know That ... An infrared camera that was originally mounted on military helicopters now has household applications? The camera has been incorporated into automobiles to enable drivers to “see” farther into the dark than was possible with standard headlights. This is just one example of innovation that many economists agree as a determinant of economic growth—the topic of this chapter.

How Do We Define Economic Growth? can be shown graphically by shifting the production possibilities curve outward reflects the fact that more of all goods can be produced within the economy

Figure 9-1 Economic Growth Distance of shift represents an increase in productive capacity Distance of shift represents an increase in productive capacity

How Do We Define Economic Growth? (cont'd) Observation India has a real GDP more than fifteen times as large as that of Denmark India’s population is about 200 times greater than that of Denmark India is relatively poor and Denmark is relatively rich

How Do We Define Economic Growth? (cont'd) Increase in per capita real GDP measured by its rate of change per year

Figure 9-2 The Historical Record of U.S. Economic Growth * Author’s estimate Source: U.S. Department of Commerce.

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 1970. 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.

Table 9-1 Per Capita Real GDP Growth Rates in Various Countries

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

Table 9-2 Costs and Benefits of Economic Growth

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? A small difference in the rate of economic growth does not matter very much for next year or the year after, but it makes considerable difference for the more distant future due to the power of compounding

Table 9-3 One Dollar Compounded Annually at Different Interest Rates

How Do We Define Economic Growth? (cont'd) GDP in 50 years at various growth rates starting at $1 trillion 3% 4% 5% $4.38 trillion $7.11 $11.5

How Do We Define Economic Growth? (cont'd) The Rule of 70 A rule stating that the appropriate number of years required for per capital real GDP to double is equal to 70 divided by the average rate of economic growth Example: At an annual growth rate of 10%, per capita real GDP should double in about:

International Example: Tracking a Global Economic Growth Divergence Between 2007 and 2009, the rate of growth in world per capita real GDP dropped from about 6 percent to -0.5 percent. There was, however, a distinct difference in the growth rates between advanced nations, such as the United States, and developing nations, such as India. While the economic growth rate for developing nations remained positive over that period, the rate of economic growth across all advanced nations was below -3 percent by 2009.

Productivity Increases: The Heart of Economic Growth Economic growth = Rate of growth of capital + Rate of growth of labor + Rate of growth in the productivity of capital and of labor

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) or the number of labor hours It increases whenever average output produced per worker (or per hour worked) during a specific time period increases

Figure 9-3 Factors Accounting for Economic Growth in Selected Regions

Saving: A Fundamental Determinant of Economic Growth Saving as a determinant of growth To have more consumption in the future, you have to consume less today and save the difference between your consumption and your income

International Example: The High Chinese Saving Rate and Its Growth Implications Since the early 1970s, residents of China have increased their overall rate of saving from 35 percent to 47 percent of real GDP. The bulk of this saving has been channeled into capital investment, which today accounts for more than 45 percent of China’s total expenditures on final goods and services. These high rates of saving and investment in China help to explain the nation’s annual rate of growth of per capita real GDP in excess of 6 percent.

Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP

New Growth Theory and the Determinants of Growth A theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact

New Growth Theory and the Determinants of Growth (cont'd) Technology: a separate factor of production When the rewards are greater, the more technological advances will occur

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)

Figure 9-5 U.S. Patent Grants

Why Not … promote innovation by awarding more patents? It is already very easy to obtain a patent from the U.S. Patent and Trademark Office. The Office sometimes even accidentally awards patents to different applicants. Making patents easier to obtain would therefore not likely promote innovation but instead it would encourage more patent applicants to establish a property right through litigation instead of research and development.

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%

New Growth Theory and the Determinants of Growth (cont'd) The open economy and economic growth Free trade encourages the spread of technology

Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade

International Example: What Economic Growth Success Stories Have in Common A study has found that since 1950, 13 nations had experienced 25-year periods of annual growth rates of at least 7 percent. One of the 5 characteristics common to these nations is their openness to international trade. Furthermore, the periods of high economic growth ended for several of these nations when their governments began restricting flows of international trade.

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

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 and other new growth theorists conclude that: economic growth can continue as long as we keep coming up with new ideas

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

Immigration, Property Rights, and Growth Population and immigration as they affect economic growth MIT economist Michael Kremer believes population growth drives technological progress Question Does immigration spur economic growth?

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

Economic Development Question How did developed countries travel paths of growth from extreme poverty to relative riches?

Economic Development (cont'd) Development Economics The study of factors that contribute to the economic growth of a country The goal of economists studying development is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones

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

Economic Development (cont'd) Relationship between population growth and economic development There are nearly 6.5 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

Figure 9-7 Expected Growth in World Population by 2050, Panel (a)

Figure 9-7 Expected Growth in World Population by 2050, Panel (b)

Economic Development (cont'd) Relationship between population growth and economic development In An Essay on the Principle of Population (1978), Thomas Robert Malthus predicted that world population growth would eventually outstrip food supplies He was proved wrong as the supply of food has been expanding faster than the increase in demand caused by increased population

Economic Development (cont'd) 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

Economic Development (cont'd) The stages of development Agricultural stage Manufacturing stage Services stage

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

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Issues & Applications: China Discovers the Growth Benefits of Patents Since the mid-2000s, China’s government has worked hard to enforce foreign patents and to spur innovative activity by encouraging Chinese companies to apply for patents. Applications for patents by Chinese firms have increased significantly since 2004. Since the late 2000s, Chinese companies have also obtained over 1,000 patents per year in the United States.

Figure 9-8 Applications for and Awards of Patents in China Since 1996

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

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

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

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