1. Karlstad Universitet Makroekonomi HT2011 Tillväxt
Per-Åke Andersson

2. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

3. 8.1 ECONOMIC GROWTH RATES  FIGURE 8.1 What Is Economic Growth?
Economic growth means an expanded production possibilities curve (PPC).

4. 8.1 Measuring Economic Growth ECONOMIC GROWTH RATES
● real GDP per capita Gross domestic product per person adjusted for changes in prices. It is the usual measure of living standards across time and between countries.
● growth rate
The percentage rate of change of a variable from one period to another.

5. 8.1 Measuring Economic Growth ECONOMIC GROWTH RATES
● rule of 70 A rule of thumb that says output will double in 70/x years, where x is the percentage rate of growth.

6. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

7. 8.1 Comparing the Growth Rates of Various Countries
ECONOMIC GROWTH RATES
Comparing the Growth Rates of Various Countries

8. A P P L I C A T I O N 1
INCREASED GROWTH LEADS TO LESS CHILD LABOR IN DEVELOPING COUNTRIES
APPLYING THE CONCEPTS #1: How does economic growth affect social indicators such as child labor?
Economists have studied the factors that lead to changes in child labor in developing countries:
Most child labor occurs in agriculture, with parents as employers, rather than in manufacturing plants.
As the incomes of the parents increase, they tend to rely less on their children and more on substitutes for child labor, such as fertilizer and new machinery.
Studies in Vietnam revealed a significant drop in child labor during the 1990s, with the bulk of that decrease accounted for by higher family incomes.
Their findings suggest we should think of child labor as a phenomenon that accompanies extreme poverty and that, over time, as economies grow, will tend to disappear.

9. 8.1 Are Poor Countries Catching Up? ECONOMIC GROWTH RATES
● convergence The process by which poorer countries close the gap with richer countries in terms of real GDP per capita.
► FIGURE 8.2 Growth Rates versus Per Capita Income, 1870–1979
Each point on the graph represents a different currently developed country. Notice that the countries with the lowest per capita incomes in 1870 (shown along the horizontal axis) are plotted higher on the graph. In other words, the tendency was for countries with lower levels of initial income to grow faster.

10. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

11. A P P L I C A T I O N 2 GROWTH NEED NOT CAUSE INCREASED INEQUALITY
APPLYING THE CONCEPTS #2: Does economic growth necessarily cause more inequality?
Economists believed that as a country developed, inequality within a country followed an inverted “U” pattern—a country initially increased and then narrowed over time. Recent research challenges the assumption that this phenomenon is solely the result of growth:
Inequality increased from 40 percent at the beginning of the 1920s to percent through the end of the Great Depression.
During World War II the share fell to 32 percent by 1944 and remained at that level until the early 1970s, at which time inequality began to again increase.
Wage and price controls during World War II reduced differentials in wages and salaries and thereby reduced inequality.
After the 1970s, salaries at the top of the income distribution increased sharply.
Inequality does not naturally accompany economic development. Other factors also play a role:
Social norms
Perceived fairness of compensation
Nature of the tax system

12. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

13. P R I N C I P L E O F D I M I N I S H I N G R E T U R N S
A P P E N D I X
A MODEL OF CAPITAL DEEPENING
P R I N C I P L E O F D I M I N I S H I N G R E T U R N S
Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.
► FIGURE 8A.1 Diminishing Returns to Capital
Holding labor constant, increases in the stock of capital increase output, but at a decreasing rate.

14. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

15. 8.2 CAPITAL DEEPENING ► FIGURE 8.3 Increase in the Supply of Capital
An increase in the supply of capital will shift the production function upward, as shown in Panel A, and increase the demand for labor, as shown in Panel B.
Real wages will increase from W1 to W2, and potential output will increase from Y1 to Y2.

16. 8.2
CAPITAL DEEPENING
How Do Population Growth, Government, and Trade Affect Capital Deepening?
P R I N C I P L E O F D I M I N I S H I N G R E T U R N S
Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.
► FIGURE 8.4 Taxes and Government Investment
If the government raises taxes by $100 and the people tend to save 20 percent of changes in income, then private savings and investment will fall by $20. However, if the government invests the funds, then total investment—private and public— will increase by $80.

17. A P P E N D I X
A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.2 Saving and Depreciation as Functions of the Stock of Capital

18. A P P E N D I X ► FIGURE 8A.3 Basic Growth Model
A MODEL OF CAPITAL DEEPENING
► FIGURE 8A.3 Basic Growth Model
Starting at K0, saving exceeds depreciation. The stock of capital increases.
This process continues until the stock of capital reaches its long-run equilibrium at K*.

19. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

20. A P P E N D I X  FIGURE 8A.4 Increase in the Saving Rate
A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.4 Increase in the Saving Rate
A higher saving rate will lead to a higher stock of capital in the long run. Starting from an initial capital stock of K1, the increase in the saving rate leads the economy to K2.

21. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

22. A P P E N D I X
A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.5 Technological Progress and Growth Technological progress shifts up the saving function and promotes capital deepening.

23. Global ekonomi, Kapitel 20, Copyright: Claes Berg & SNS Förlag

24. THE KEY ROLE OF TECHNOLOGICAL PROGRESS
8.3
THE KEY ROLE OF TECHNOLOGICAL PROGRESS
How Do We Measure Technological Progress?
► FIGURE 8.5 Contributions to Real GDP Growth, 1929–1982 (average annual percentage rates)

25. THE KEY ROLE OF TECHNOLOGICAL PROGRESS
8.3
THE KEY ROLE OF TECHNOLOGICAL PROGRESS
Using Growth Accounting
Growth accounting is a useful tool for understanding different aspects of economic growth.
As an example, economic growth slowed throughout the entire world during the 1970s. Using growth accounting methods, economists typically found the slowdown could not be attributed to changes in the quality or quantity of labor inputs or to capital deepening. Either a slowdown in technological progress or other factors not directly included in the analysis, such as higher worldwide energy prices, must have been responsible. This led economists to suspect that higher energy prices were the primary explanation for the reduction in economic growth.

26. A P P L I C A T I O N 3
SOURCES OF GROWTH IN CHINA AND INDIA
APPLYING THE CONCEPTS #3: How can we use economic analysis to understand the sources of growth in different countries?
China and India are the two most populous countries in the world and have also grown very rapidly in recent years.
From 1978 to 2004, GDP in China grew at the astounding rate of 9.3 percent per year while India’s GDP grew at a lower but still robust rate of 5.4 percent per year.
Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan used growth accounting to answer this question.
Their analysis revealed that China’s more rapid growth was primarily caused by more rapid accumulation of physical capital and more rapid technological progress. China invested much more than India in physical capital and was able to increase its technological progress at a more rapid rate.

27. A P P L I C A T I O N 4 GROWTH ACCOUNTING AND INFORMATION TECHNOLOGY
APPLYING THE CONCEPTS #4: How much did the information revolution contribute to U.S. productivity growth?
 FIGURE 8.6 U.S. Annual Productivity Growth, 1959–2007
In recent years, there has been a resurgence of productivity growth in part caused by the information technology revolution.

28. WHAT CAUSES TECHNOLOGICAL PROGRESS?
8.4
WHAT CAUSES TECHNOLOGICAL PROGRESS?
Research and Development Funding
▼ FIGURE 8.7 Research and Development as a Percent of GDP, 1999
The United States spends more total money than any other country on research and development. However, when the spending is measured as a percentage of each nation’s GDP, Japan spends more. A big part of U.S. spending on research and development is in defense-related areas.

29. 8.4 Monopolies That Spur Innovation The Scale of the Market
WHAT CAUSES TECHNOLOGICAL PROGRESS?
Monopolies That Spur Innovation
● creative destruction
The view that a firm will try to come up with new products and more efficient ways to produce products to earn monopoly profits.
The Scale of the Market
Adam Smith stressed that the size of a market was important for economic development. In larger markets, firms have more incentives to come up with new products and new methods of production. Just as Schumpeter suggested, the lure of profits guides the activities of firms, and larger markets provide firms the opportunity to make larger profits. This supplies another rationale for free trade. With free trade, markets are larger, and there is more incentive to engage in technological progress.

30. 8.4
WHAT CAUSES TECHNOLOGICAL PROGRESS?
Induced Innovations
Some economists have emphasized that innovations come about through inventive activity designed specifically to reduce costs. This is known as induced innovation.
Education, Human Capital, and the Accumulation of Knowledge
Education can contribute to economic growth in two ways. First, the increased knowledge and skills of people complement our current investments in physical capital. Second, education can enable the workforce in an economy to use its skills to develop new ideas or to copy ideas or import them from abroad.
New Growth Theory
● new growth theory
Modern theories of growth that try to explain the origins of technological progress.

31. Men and women have grown taller and heavier in the last 300 years.
A P P L I C A T I O N 5
A VIRTUOUS CIRCLE: GDP AND HEALTH
APPLYING THE CONCEPTS #6: How are economic growth and health related to one another?
Men and women have grown taller and heavier in the last 300 years.
An average U.S. adult male today stands at approximately 5 feet 10 inches tall, nearly 4.5 inches taller than the typical Englishman in the late eighteenth century.
The average weight of English males in their thirties was about 134 pounds in 1790—20 percent below today’s average.
A typical Frenchman in his thirties at that time weighed only 110 pounds!
Lower weights and heights were due to inadequate food supplies and chronic malnutrition, which in turn results in a higher incidence of chronic disease.
In France, 20 percent of the labor force lacked enough physical energy to put in more than three hours of light work a day.
Economic growth increased food supplies and enabled workers to become more productive and increase GDP even more.

32. 8.5
A KEY GOVERNMENTAL ROLE: PROVIDING THE CORRECT INCENTIVES AND PROPERTY RIGHTS
What is the connection between property rights and economic growth?
Without clear property rights, there are no proper incentives to invest in the future—the essence of economic growth.
What else can go wrong?
Governments in developing countries often:
Adopt policies that effectively tax exports
Pursue policies that lead to rampant inflation
Enforce laws that inhibit the growth of the banking and financial sectors
Results:
Fewer exports
Uncertain financial environment
Reduced saving and investment
With the right incentives, individuals and firms in developing countries will take actions that promote economic growth.

33. A P P L I C A T I O N 7
LACK OF PROPERTY RIGHTS HINDERS GROWTH IN PERU
APPLYING THE CONCEPTS #7: Why are clear property rights important for economic growth in developing countries?
Throughout the developing world, property is often not held with clear title. Without clear title, property cannot be used as collateral for loans.
Result: The poor living on very valuable land may be unable to borrow against that land to start a new business.
Producing palm oil in Peru is very profitable, but it depends upon the ability to borrow funds.
Production of coca paste—an ingredient to cocaine—does not take as much time and does not depend on finance.
Switching farmers away from production of coca paste to palm oil also requires improvements in finance, which are very difficult without clear property rights.