Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 37 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.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 37 Why Did the Industrial Revolution Begin in England? Making the Connection The British government’s guarantee of property rights set the stage for the Industrial Revolution. Industrial Revolution The application of mechanical power to the production of goods, beginning in England around 1750.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 37 GDP per Capita, 2006 Economic Growth Over Time and Around the World “The Rich Get Richer and... ”

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 37 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. Technological change helps economies avoid diminishing returns to capital.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 37 The Per-Worker Production Function What Determines How Fast Economies Grow? The Per-Worker Production Function

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 37 Why Isn’t the Whole World Rich? FIGURE 10-7 The Catch-up Predicted by the Economic Growth Model Catch-up: Sometimes, but Not Always 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.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 37 FIGURE 10-8 There Has Been Catch-up among Industrial Countries Catch-up Among the Industrial Countries Why Isn’t the Whole World Rich? Catch-up: Sometimes, but Not Always

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 37 Convergence in Output/Capita? – The OECD

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 37 Looking Across Lots of Countries – Convergence ???

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 37 Looking Across Countries – A Closer Look Conditional convergence Human capital Geography and resources Institutions: Rule-of-law/property rights/finance

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 37 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

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 37 Technological Change Increases Output per Hour Worked What Determines How Fast Economies Grow? Technological Change: The Key to Sustaining Economic Growth

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 37 Using the Economic Growth Model to Analyze the Failure of the Soviet Union’s Economy Stalinist growth: Continually increase saving rate

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 14 of 37 FIGURE 10-9 Most of the World Hasn’t Been Catching Up Are the Developing Countries Catching Up to the Industrial Countries? Why Isn’t the Whole World Rich? Catch-up: Sometimes, but Not Always

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 37 Solved Problem 10-4 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,

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 16 of 37 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

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 17 of 37 Failure to Enforce the Rule of Law FIGURE The Rule of Law and Growth Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth?

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 18 of 37 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. Foreign direct investment (FDI) The purchase or building by a corporation of a facility in a foreign country.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 19 of 37 Why Isn’t the Whole World Rich? The Benefits of Globalization FIGURE Globalization and Growth

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 20 of 37 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.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 21 of 37 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

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 22 of 37 Was It a Measurement Problem? Was It the Effect of High Oil Prices? Was It the Declining Quality of Labor? The Productivity Slowdown Affected All Industrial Countries Economic Growth in the United States What Caused the Productivity Slowdown of 1973–1994?

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 23 of 37 Why Has Productivity Growth Been Faster in the United States than in Other Countries? FIGURE 10-6 Productivity Growth in the Leading Industrial Economies, 1996–2006 Economic Growth in the United States The Productivity Boom: Are We in a “New Economy”?

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 24 of 37 An Inside LOOK Entrepreneurship and Sustained Economic Growth in Europe Feeling Brighter Figure 1. To increase output per worker during the aftermath of World War II, Europe increased capital per worker. Figure 2. To increase output per worker today, Europe must find new and innovative ways to produce.

Chapter 10: Long-Run Economic Growth: Sources and Policies © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 25 of 37 Globalization and the Spread of Technology in Bangladesh Making the Connection The spread of technology spurred Bangladesh’s booming clothing industry.