1. Global Economic Growth and Development
Chapter 9
Global Economic Growth and Development

2. 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.

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

4. 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

5. Chapter Outline How Do We Define Economic Growth?
Productivity Increases: The Heart of Economic Growth
Saving: A Fundamental Determinant of Economic Growth

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

7. 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?

8. 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.

9. 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

10. 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.

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

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

13. Per Capita Growth Rates in Various Countries
Table 9-1

14. 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?

15. How Do We Define Economic Growth?
Is economic growth bad?
There are costs along with benefits of economic growth.

16. 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

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

18. 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

19. One Dollar Compounded Annually at Different Interest Rates
Number
of Years 3% 4% 5% 6% 8% 10% 20%
,470.00
,100.00

20. 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

21. Productivity Increases: The Heart of Economic Growth
Labor Productivity
Total real domestic output (real GDP) divided by the number of workers (output per worker)

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

23. 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.

24. 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.

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

26. 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

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

28. 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)

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

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

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

32. 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

33. New Growth Theory and What Determines Growth
Figure 9-7

34. 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.

35. 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.

36. 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.

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

38. 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.

39. 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.

40. 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.

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

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

43. 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

44. Economic Development: The Stages of Development
Agricultural stage
Manufacturing stage
Services stage

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

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