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

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

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.

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

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 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 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.

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

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?

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?

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

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)

Figure 9-3 Factors Accounting for Economic Growth in Selected Regions Source: International Monetary Fund.

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.

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.

Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP Source: World Bank.

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 The greater the rewards, the more technological advances we will get.

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)

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 9-5 U.S. Patent Grants Source: U.S. Patent and Trademark Office.

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 suggests that growth can continue as long as we come 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.

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 development economists 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 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.

Figure 9-7 Expected Growth in World Population by 2050, Panel (a) Source: United Nations.

Figure 9-7 Expected Growth in World Population by 2050, Panel (b) Source: United Nations.

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

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

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.