Macroeconomics ECON 2301 Spring 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 9

Announcement 4 I’m sorry to have to inform you that we must postpone the 2 nd exam till March I will be out of town March 26. During our regular class time that day, please work on your projects.

Chapter 9: Global Economic Growth & Development

9-4 Learning Objectives 1.Define economic growth 2.Recognize the importance of economic growth rates 3.Explain why productivity increases are crucial for maintaining economic growth 4.Describe the fundamental determinants of economic growth 5.Understand the basis of new growth theory 6.Discuss the fundamental factors that contribute to a nation’s economic development

9-5 Did You Know That... 4 Only one European nation, Luxembourg, has per capita real GDP higher than the U.S. per capita GDP? 4 Per capita GDP has grown more rapidly in some U.S. states than in some European nations? 4 These states have experienced a higher rate of economic growth?

9-6 How Do We Define Economic Growth? 4 Economic growth can be shown graphically by shifting the production possibilities curve outward. 4 Economic growth reflects the fact that more of all goods can be produced within the economy.

9-7 Figure 9-1 Economic Growth Distance of shift represents an increase in productive capacity

9-8 How Do We Define Economic Growth? (cont'd) 4 Observation ÜIndia has a real GDP more than fifteen times as large as that of Denmark. ÜIndia’s population is about 200 times greater than that of Denmark. ÜIndia is relatively poor and Denmark is relatively rich.

9-9 How Do We Define Economic Growth? (cont'd) 4 Economic Growth ÜIncrease in per capita real GDP measured by its rate of change per year

9-10 Figure 9-2 The Historical Record of U.S. Economic Growth

9-11 Table 9-1 Per Capita Real GDP Growth Rates in Various Countries

9-12 How Do We Define Economic Growth? (cont'd) 4 Question ÜIf your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off? 4 Is economic growth bad? ÜSome psychologists contend that growth makes us worse off. ÜAs with all activities there are costs along with benefits to growth

9-13 Table 9-2 Costs and Benefits of Economic Growth

9-14 How Do We Define Economic Growth? (cont'd) 4 The importance of growth rates ÜDo we need to worry about small differences in the economic growth rate?

9-15 Table 9-3 One Dollar Compounded Annually at Different Interest Rates

9-16 3%4%5% $4.38 trillion $7.11 trillion $11.5 trillion How Do We Define Economic Growth? (cont'd) 4 GDP in 50 years at various growth rates starting at $1 trillion

9-17 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)

9-18 Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics Figure 9-3 Factors Accounting for Economic Growth in Selected Regions

9-19 Example: Is Official Labor Productivity Growth Overstated? 4 BLS reports U.S. labor productivity has increased by at least 21% since Self-employed people, managers, part-time, and temporary employees are excluded. 4 Including these forms of labor might reduce productivity to as low as 11%.

9-20 Saving: A Fundamental Determinant of Economic Growth 4 To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.

9-21 Source: World Bank Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP

9-22 New Growth Theory and What Determines Growth 4 New Growth Theory ÜA theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact 4 Technology: a separate factor of production ÜThe greater the rewards, the more technological advances we will get.

9-23 New Growth Theory and What Determines Growth (cont'd) 4 Research and development (R&D) ÜPatent 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) ÜPositive 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%.

9-24 Source: World Bank Figure 9-5 U.S. Patent Grants

9-25 New Growth Theory and What Determines Growth (cont'd) 4 Innovation ÜTransforming an invention into something that is useful to humans 4 The open economy and economic growth ÜFree trade encourages the spread of technology.

9-26 Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade

9-27 New Growth Theory and What Determines Growth (cont'd) 4 The importance of ideas and knowledge ÜKnowledge, ideas, and productivity are related; ideas are what drive economic growth. ÜEconomist Paul Romer suggests that growth can continue as long as we come up with new ideas.

9-28 Figure 9-7 The Winnowing Process of Research and Development

9-29 New Growth Theory and What Determines Growth (cont'd) 4 The importance of human capital ÜKnowledge, ideas and, productivity are all tied together. ÜHuman capital consists of knowledge people acquire. ÜInvesting in human capital raises living standards.

9-30 Immigration, Property Rights & Growth 4 Population and immigration as they affect economic growth ÜMIT economist Michael Kremer believes population growth drives technological progress. 4 Question ÜDoes immigration spur economic growth?

9-31 Immigration, Property Rights & Growth (cont'd) 4 Question ÜHow can well-defined property rights stimulate economic growth? 4 Answers ÜThe more certain property rights are, the more capital accumulation there will be. ÜThe more certain are property rights, the more entrepreneurship there will be.

9-32 Economic Development 4 Question ÜHow did developed countries travel paths of growth from extreme poverty to relative riches? 4 Development Economics ÜThe study of factors that contribute to the economic growth of a country ÜThe 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.

9-33 Economic Development (cont'd) 4 Putting world poverty into perspective ÜAt least one-half of the world’s population lives at subsistence level. Ü20% of the world lives on less than $1 per day. ÜThe U.S. poverty level exceeds the average income of 1/2 the world.

9-34 Economic Development (cont'd) 4 Relationship between population growth and economic development ÜThere are nearly 7 billion people on earth. ÜBy 2050, according to the U.N., world population will be close to 9.1 billion. ÜGrowth will occur mainly in developing nations.

9-35 Figure 9-8 Expected Growth in World Population by 2050, Panel (a)

9-36 Figure 9-8 Expected Growth in World Population by 2050, Panel (b)

9-37 Economic Development (cont'd) 4 The relationship between population growth and economic development ÜGrowth leads to smaller families. ÜThe more economic development occurs, the slower the population growth rate. ÜBirth rates decline with modernization. Reduced infant mortality People do not rely on children to take care of them in old age

9-38 Economic Development (cont'd) 4 The stages of development ÜAgricultural stage ÜManufacturing stage ÜServices stage 4 Keys to economic development ÜEstablishing a system of property rights ÜDeveloping an educated population ÜLetting “creative destruction” run its course ÜLimiting protectionism

9-39 Issues and Applications: Winners and Losers in the Brain-Drain Game 4 The losers: nations with huge outflows of human capital; this damages prospects for economic growth. 4 The winners: countries receiving highly skilled workers who immigrate and provide a “brain- gain.”

9-40 Figure 9-9 Nations with the Largest Percentage Emigrations of Skilled Workers

9-41 Summary of Learning Objectives 1. Economic growth: The rate of economic growth is the annual rate of change in per capita GDP. 2. 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. 3. 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.

9-42 Summary of Learning Objectives (cont'd) 4. The key determinants of economic growth: Increases in the labor force, the growth of capital, and the growth of productivity 5. New growth theory: Emphasizes how rewards to innovation contribute to higher growth rates 6. 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.

Assignment to be completed before class March 24: Study Chapters 6-9, remembering to attempt to answer the assigned end- of-chapter questions. Be prepared to ask questions during the review session.