Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 9 Global Economic Growth and Development

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-2 Introduction What do Australia, Bulgaria, Germany, and Japan all have in common? The answer is that they are among more than 20 nations throughout the world that now off significant financial incentives for women to bear children. Their objective is to provide a stronger foundation for future economic growth. In this chapter, you will learn about the measurement of economic growth, about the importance of growth rates, and about the key factors that determine economic growth.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-3 Learning Objectives Define economic growth Recognize the importance of economic growth rates Explain why productivity increases are crucial for maintaining economic growth Discuss the fundamental factors that contribute to a nation’s economic development

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-4 Figure 9-1 Distance of shift represents an increase in productive capacity How Do We Define Economic Growth?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-5 How Do We Define Economic Growth? (cont'd) Economic Growth –Increase in per capita real GDP measured by its rate of change per year

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-6 Figure 9-2 The Historical Record of U.S. Economic Growth Source: U.S. Department of Commerce.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-7 Growth: Better, more affordable shelter

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-8 Growth: More comfort

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-9 Growth: Same Big Mac, but more affordable

Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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. Question –If your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Table 9-2 Costs and Benefits of Economic Growth

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 9-12

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Table 9-3 One Dollar Compounded Annually at Different Interest Rates A small difference can make a big difference in growth

Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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 –Exercise: –Growth = 2%, years to double = ? –Growth = 3.5%, years to double = ?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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 Labor Productivity –Total real domestic output (real GDP) divided by the number of workers (output per worker)

Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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. Key: Present vs. Future

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Source: World Bank. Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Economic Development (cont'd) The relationship between population growth and economic development –Growth leads to smaller families, lower birth rates. –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 Why a conflict between work and having babies?

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Economic Development (cont'd) Keys to economic development –Establishing a system of property rights –Developing an educated population (not high population growth) –Letting “creative destruction” (free market) run its course –Limiting protectionism (opposite of free trade)

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade Source: World Bank.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved Myth #9: Life is worst today, why me? Sure, let’s send you back to the 1950s (go- go years)…pick a year yourself You can’t find a laptop, cell phone, DVD, iPod, can drinks (only in glass bottles) You have to work half an hour to pay for a burger (but 10 minutes today)