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

Introduction The prospects for economic growth in any one country should be reflected in the overall level of its stock prices. Higher prices indicate higher expected profitability of these firms, which would arise from economic growth.

Learning Objectives Define economic growth Recognize the importance of economic growth rates Describe the fundamental determinants of economic growth

Learning Objectives Explain why productivity increases are crucial for maintaining 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

Chapter Outline New Growth Theory and the Determinants of Growth Population and Immigration as They Affect Economic Growth Property Rights and Entrepreneurship Economic Development

Did You Know That... The use of handheld tracking devices has created significant efficiencies in the package delivery industry? The growth rate of our economy as a whole is affected by innovations such as this?

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

Economic Growth 2035 Annual Output of Manufactured Goods 2007 Distance of shift represents an increase in productive capacity Annual Output of Agricultural Goods Figure 9-1

How Do We Define Economic Growth? Observation India’s GDP is three times larger than Switzerland. India’s population is 125 times larger than Switzerland. India is relatively poor and Switzerland is relatively rich.

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

The Historical Record of U.S. Economic Growth Figure 9-2

Per Capita Growth Rates in Various Countries Table 9-1

How Do We Define Economic Growth? Problems in definition Distribution of output and income Leisure time 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? Is economic growth bad? There are costs along with benefits of economic growth.

Costs and Benefits of Economic Growth • Reduction in illiteracy • Reduction in poverty • Improved health • Longer lives • Political stability Costs • Environmental pollution • Breakdown of the family • Isolation and alienation • Urban congestion

How Do We Define Economic Growth? The importance of growth rates Do we need to worry about small differences in the economic growth rate?

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

One Dollar Compounded Annually at Different Interest Rates Number of Years 3% 4% 5% 6% 8% 10% 20% 1 1.03 1.04 1.05 1.06 1.08 1.10 1.20 2 1.06 1.08 1.10 1.12 1.17 1.21 1.44 3 1.09 1.12 1.16 1.19 1.26 1.33 1.73 4 1.13 1.17 1.22 1.26 1.36 1.46 2.07 5 1.16 1.22 1.28 1.34 1.47 1.61 2.49 6 1.19 1.27 1.34 1.41 1.59 1.77 2.99 7 1.23 1.32 1.41 1.50 1.71 1.94 3.58 8 1.27 1.37 1.48 1.59 1.85 2.14 4.30 9 1.30 1.42 1.55 1.68 2.00 2.35 5.16 10 1.34 1.48 1.63 1.79 2.16 2.59 6.19 20 1.81 2.19 2.65 3.20 4.66 6.72 38.3 30 2.43 3.24 4.32 5.74 10.00 17.40 237.00 40 3.26 4.80 7.04 10.30 21.70 45.30 1,470.00 50 4.38 7.11 11.50 18.40 46.90 117.00 9,100.00

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 Labor Productivity Total real domestic output (real GDP) divided by the number of workers (output per worker)

Non-Farm U.S. Productivity Growth Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics Figure 9-3

Example: The Labor Productivity Boom in U. S. Manufacturing How has U. S. manufacturing output quintupled in the past 50 years, even though employment in that sector of the economy has remained stable? Labor productivity in U.S. manufacturing has risen due to improvements in organization and technology.

One Fundamental Determination of the Rate of Economic Growth: The Rate of Saving To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.

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

New Growth Theory and What Determines 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 What Determines Growth Technology: a separate factor of production The greater the rewards, the more technological advances we will get

New Growth Theory and What Determines Growth 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 What Determines Growth Research and Development (R&D) Positive externalities and R&D

New Growth Theory and What Determines Growth The open economy and economic growth Free trade encourages the spread of technology.

The Relationship Between Protectionism and Economic Growth Figure 9-6 Source: World Bank

New Growth Theory and What Determines Growth Innovation Transforming an invention into something that is useful to humans Economic growth can continue We must keep coming up with new ideas

New Growth Theory and What Determines Growth Figure 9-7

New Growth Theory and What Determines Growth The importance of human capital Knowledge, ideas, and productivity are related. Increases in the productivity of the labor force are a function of increases in human capital. Policy that increases human capital will lend to more economic growth.

New Growth Theory and What Determines Growth Economist Paul Romer suggests that economic growth can continue as long as we keep coming up with new ideas.

E-Commerce Example: VoIP Comes Into Its Own Voice over Internet Protocol is an innovation that took some time to find its niche in improving productivity. Although the developers thought it would be embraced by the residential market, in fact VoIP has found wider use in transferring data across telephone networks within corporations.

Population and Immigration as They Affect Economic Growth Question Does immigration reduce economic growth?

Property Rights and Entrepreneurship Question How can well-defined property rights stimulate economic growth? Answer 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? 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 At least one-half of the world’s population lives at subsistence level. The official poverty level in the U.S. exceeds the average income of one- half the world.

Expected Growth in World Population Figure 9-8, Panel (a)

Expected Growth in World Population Figure 9-8, Panel (b)

Economic Development The relationship between population growth and economic development 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: The Stages of Development Agricultural stage Manufacturing stage Services stage

Economic Growth: Keys to Economic Development An educated population: Increased secondary education enhances growth. Establish a system of property rights: Certain property rights encourage growth. Letting creative destruction take its course: Some businesses fail; new ones grow. Limiting protectionism: Free trade allows for productivity growth.

Issues and Applications: Using the Stock Market to Predict Productivity Increased productivity of labor and capital contributes to greater economic growth. Those who invest in corporate stocks have strong financial incentives to create accurate forecasts of future earnings arising from the firm’s productivity.

Issues and Applications: Using the Stock Market to Predict Productivity Economic research suggests that fluctuations in stock prices are good predictors of future economic growth.

Summary Discussion of Learning Objectives The rate of economic growth is the annual rate of change in per capita GDP. Over long intervals, relatively small differences in the economic growth rate produce large differences in per capita incomes. The key determinants of economic growth are increases in the labor force, the growth of capital, and the growth of productivity.

Summary Discussion of Learning Objectives For a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion. New growth theory emphasizes how rewards to innovation contribute to higher growth rates. Nations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of economic development.

Global Economic Growth and Development End of Chapter 9 Global Economic Growth and Development