osp6_survey13

Prepared By Brock Williams

Chapter 13

Why do Economies Grow?For many people, the thought of poverty conjures up poor, African children, but since

1995, African poverty rates have been falling steadily.

Copyright ©2014 Pearson Education, Inc. All rights reserved. 13-2

Learning Objectives

1. Calculate economic growth rates2. Explain the role of capital in economic

growth3. Apply growth accounting to measure

technological progress4. Discuss the sources of technological

progress5. Assess the role of government in assisting

economic growth


● capital deepeningIncreases in the stock of capital per worker.

● technological progressMore efficient ways of organizing economic affairs that allow an economy to increase output without increasing inputs.

● human capitalThe knowledge and skills acquired by a worker through education and experience and used to produce goods and services.

13.1 ECONOMIC GROWTH RATES


FIGURE 13.1What Is Economic Growth?

Economic growth means an expanded production possibilities curve (PPC).

13.1 ECONOMIC GROWTH RATES (cont.)


Measuring Economic Growth

● real GDP per capitaGross 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.



● rule of 70A rule of thumb that says output will double in 70/x years, where x is the percentage rate of growth.

Measuring Economic Growth



Comparing the Growth Rates of Various Countries


▼ TABLE 13.1Gross National Income Per Capita and Economic Growth


GLOBAL WARMING, RICH COUNTRIES, AND POOR COUNTRIES

APPLYING THE CONCEPTS #1: How may global warming affect economic growth?

The effects of global warming on economic development are very complex•The effect of increases in temperature seem to be confined to poor countries•In Latin and South America, each 1 degree Celsius increase resulted in a 1.2 to 1.9 percent decline in per capita income•Exports also declined between 2.0 and 5.7 percent.•By deferring global warming into the future, poor countries may have time to develop and avoid the worst of the impact.

A P P L I C A T I O N 1


Are Poor Countries Catching Up?● convergence

The process by which poorer countries close the gap with richer countries in terms of real GDP per capita.

► FIGURE 13.2Growth 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.

SOURCE: M. Obstfeld and K. Rogoff,Foundations of International Macroeconomics(Cambridge, MA: MIT Press, 1996), Table 7.1.



ECONOMIC EQUALITY MAY SUSTAIN ECONOMIC GROWTHAPPLYING THE CONCEPTS #2: Is there a necessary tradeoff

between equality and growth?

What is the connection between inequality and economic growth? Is there a trade-off such that higher growth can only occur if there is increased inequality. Recent research suggests that this may not be the case—equality may be beneficial to economic growth.

Andrew Beg and Jonathan Ostry explored the factors that determined why some countries had longer spells of sustained growth than others. Almost all countries can begin to grow, but it is more difficult to sustain growth. What they found was that when there was more equality, spells of growth within a country tended to last longer.

Why might equality have a beneficial effect? The authors speculate that when there is more equality governments may be able to have enough power and authority to make the tough choices to sustain growth. Growth and equality could, however, be possibly caused by some common factor. For example, well-functioning markets for credit and loans may lead to both more growth and more equality. The good news is that it does not appear necessary to create inequality in order to promote growth.



► FIGURE 13.3Increase 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.

13.2 CAPITAL DEEPENING


Saving and Investment

● savingIncome that is not consumed.

13.2 CAPITAL DEEPENING (cont.)


How Do Population Growth, Government, and Trade Affect Capital Deepening?

► FIGURE 13.4Taxes 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.

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.

13.2 CAPITAL DEEPENING (cont.)


● growth accounting

A method to determine the contribution to economic growth from increased capital, labor, and technological progress.

How Do We Measure Technological Progress?

13.3 THE KEY ROLE OFTECHNOLOGICAL PROGRESS


► FIGURE 13.5Contributions to Real GDP Growth, 1929–1982 (average annual percentage rates)

SOURCE: Edward F. Denison, Trends in American Economic Growth 1929–1982 (Washington, D.C.: The Brookings Institution, 1985).

How Do We Measure Technological Progress?

13.3 THE KEY ROLE OFTECHNOLOGICAL PROGRESS (cont.)


SOURCES OF GROWTH IN CHINA AND INDIAAPPLYING 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 and have also grown very rapidly in recent years.

From 1978 to 2004, GDP in China grew at the rate of 9.3 percent per year while India’s GDP grew at a lower 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.

▪ China’s rapid growth was caused by more rapid accumulation of physical capital and more rapid technological progress.

▪ China invested much more in physical capital and was able to increase its technological progress at a more rapid rate.



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.

13.3 THE KEY ROLE OFTECHNOLOGICAL PROGRESS (cont.)


GROWTH ACCOUNTING AND INTANGIBLE CAPITALAPPLYING THE CONCEPTS #4: How do you measure the

technological revolution?

Traditional growth theory focused on easily measured items, such as hours of work or the amount of physical capital. But as our economy advances, the factors that contribute to production are harder to measure. For example, why has Google had such a big impact on our economy? They do not produce machines or cars—they mostly produce ideas and information-related products. Can we still use growth accounting in this new world?

Economists have made considerable progress in adapting growth accounting to this new environment. The idea they use is to create a measures of “intangible” capital based on expenditures on research and development, marketing, design and customer support. Once they have this measure of intangible capital, they can use it along with conventional measures of capital and labor to understand the sources of economic growth.

Estimates by economists Carol Corrado and Charles Hulten suggest that intangible capital is an important source of economic growth. They found that in recent years, the contribution from intangible capital actually exceeded the contribution from traditional or tangible capital. Together, the two capital measures also contributed more to economic growth than technological progress.



Using Growth Accounting (cont’d)

Labor productivity Output per hour of work, labor productivity is a simple measure of how much a typical worker can produce given the amount of capital in the economy and the state of technological progress. From 1947 to the worldwide oil crisis in 1973, labor productivity grew rapidly. Productivity growth fell in the remainder of the 1970s and slowly increased over the next two decades. Since 2007, productivity growth has also slowed from recent trends, partly due to the recession. Economists have used growth accounting to help explain these trends in productivity growth in the United States. Economic research suggests that the oil shocks in the 1970s reduced technological progress but the information revolution in the 1980s and 1990s led to a resurgence of technological progress.

▶ Figure 13.6U.S. Annual Productivity Growth,1947–2011SOURCE: Bureau of Labor Statistics, 2012.


Research and Development Funding

▼ FIGURE 13.7Research 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.

SOURCE: National Science Foundation, National Patterns of R&D Resources, 2002, Washington D.C.

13.4 WHAT CAUSESTECHNOLOGICAL 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. 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.

13.4 WHAT CAUSESTECHNOLOGICAL PROGRESS? (cont.)


Induced Innovations

Education, Human Capital, and the Accumulation of Knowledge

Some economists have emphasized that innovations come about through inventive activity designed specifically to reduce costs. This is known as induced innovation.

New Growth Theory● new growth theory Modern theories of growth that try to explain the

origins of technological progress.

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.

13.4 WHAT CAUSESTECHNOLOGICAL PROGRESS? (cont.)


THE ROLE OF POLITICAL FACTORS IN ECONOMIC GROWTH

APPLYING THE CONCEPTS #5 How do varying political institutions affect economic growth?

Growth can, and has, occurred in both authoritarian and participatory governments.

Transformative economic growth like the Industrial Revolution usually requires participatory institutions.

▪ Sustained technological progress is disruptive and authoritarian regimes have difficulty dealing with the change.

▪ The old monarchies of Europe fell and were replaced with democracies or limited monarchies.

▪ Can China maintain strong economic growth without political transformation?



CULTURE, EVOLUTION. AND ECONOMIC GROWTHAPPLYING THE CONCEPTS #6: Did culture or evolution spark

the Industrial Revolution?

In studying the economic history of England before the Industrial Revolution, Professor Clark discovered an interesting fact. ▪ He found that children of the more affluent members of English society were more likely to survive than those of the less affluent. ▪ With the slow growth of population over several centuries, this differential survival of the wealthy had the effect of creating downward mobility for the rich, as their sons and daughters increasingly populated the society.

This change had profound effects on English society. The cultural habits of the rich filtered through the entire society. ▪ Social virtues such as thrift, prudence, and hard work became more commonplace, while impulsive and violent behaviors were reduced. ▪ Eventually, these changes in culture became sufficiently pronounced that a qualitative change took place in society.



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.

13.5 A KEY GOVERNMENTAL ROLE: PROVIDING THE CORRECT INCENTIVES AND PROPERTY RIGHTS


LACK OF PROPERTY RIGHTS HINDERSGROWTH 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.



K E Y T E R M S

capital deepening

convergence

creative destruction

growth accounting

growth rate

human capital

labor productivity

new growth theory

real GDP per capita

rule of 70

saving

technological progress

Date post:	15-Apr-2017
Category:	Documents
Upload:	ana-ojeda
View:	214 times
Download:	2 times

osp6_survey13

Documents