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					Macroeconomics
 ECON 2301
 Spring 2009

Marilyn Spencer, Ph.D.
Professor of Economics

      Chapter 9
            Announcement
 I’m sorry to have to inform you that we
  must postpone the 2nd exam till March 31.
 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
            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

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



                         9-5
How Do We Define Economic Growth?
 Economic growth can be shown graphically by
  shifting the production possibilities curve outward.

 Economic growth reflects the fact that more of all
  goods can be produced within the economy.




                         9-6
Figure 9-1 Economic Growth


                  Distance of shift
                  represents an increase
                  in productive capacity




            9-7
      How Do We Define
   Economic Growth? (cont'd)
 Observation
  India has a real GDP more than fifteen times
   as large as that of Denmark.
  India’s population is about 200 times greater
   than that of Denmark.
  India is relatively poor and Denmark is
   relatively rich.

                        9-8
      How Do We Define
   Economic Growth? (cont'd)
 Economic Growth
  Increase in per capita real GDP measured by its
   rate of change per year




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




               9-10
 Table 9-1 Per Capita Real GDP
Growth Rates in Various Countries




               9-11
    How Do We Define Economic
         Growth? (cont'd)
 Question
  If your leisure time increases 1 hour/week
    and your commute time to work increases by
    2 hours/week, are you better off?

 Is economic growth bad?
   Some psychologists contend that growth
     makes us worse off.
   As with all activities there are costs along
     with benefits to growth
                          9-12
Table 9-2 Costs and Benefits
   of Economic Growth




             9-13
       How Do We Define
    Economic Growth? (cont'd)
 The importance of growth rates
  Do we need to worry about small differences
   in the economic growth rate?




                      9-14
Table 9-3 One Dollar Compounded
Annually at Different Interest Rates




                 9-15
       How Do We Define
    Economic Growth? (cont'd)
 GDP in 50 years at various growth rates
  starting at $1 trillion

             3%        4%          5%


           $4.38      $7.11      $11.5
           trillion   trillion   trillion


                        9-16
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




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

                            9-17
Figure 9-3 Factors Accounting for Economic
        Growth in Selected Regions




Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics


                                           9-18
     Example: Is Official Labor
  Productivity Growth Overstated?
 BLS reports U.S. labor productivity has
  increased by at least 21% since 2000.
 Self-employed people, managers, part-time, and
  temporary employees are excluded.
 Including these forms of labor might reduce
  productivity to as low as 11%.



                        9-19
Saving: A Fundamental Determinant
       of Economic Growth
 To have more consumption in the future,
  you must consume less today and save the
  difference between your consumption and
  your income.




                     9-20
Figure 9-4 Relationship Between Rate
 of Saving and Per Capita Real GDP




           Source: World Bank
                                       9-21
     New Growth Theory and
     What Determines Growth
 New Growth Theory
  A theory of economic growth that examines the
   factors that determine why technology,
   research, innovation, and the like are
   undertaken and how they interact

 Technology: a separate factor of production
  The greater the rewards, the more technological
   advances we will get.
                       9-22
 New Growth Theory and What Determines
            Growth (cont'd)
 Research and development (R&D)
  Patent 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)
  Positive 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%.

                          9-23
Figure 9-5 U.S. Patent Grants




           Source: World Bank


                 9-24
      New Growth Theory and
   What Determines Growth (cont'd)
 Innovation
  Transforming an invention into something that
   is useful to humans

 The open economy and economic growth
  Free trade encourages the spread of technology.



                       9-25
Figure 9-6 The Relationship Between Economic
Growth and Tariff Barriers to International Trade




                       9-26
      New Growth Theory and
   What Determines Growth (cont'd)
 The importance of ideas and knowledge
  Knowledge, ideas, and productivity are related;
   ideas are what drive economic growth.
  Economist Paul Romer suggests that growth
   can continue as long as we come up with new
   ideas.



                       9-27
Figure 9-7 The Winnowing Process
   of Research and Development




               9-28
       New Growth Theory and
    What Determines Growth (cont'd)
 The importance of human capital
  Knowledge, ideas and, productivity are all tied
   together.
  Human capital consists of knowledge people
   acquire.
  Investing in human capital raises living
   standards.

                         9-29
   Immigration, Property Rights &
              Growth
 Population and immigration as they affect
  economic growth
  MIT economist Michael Kremer believes
   population growth drives technological
   progress.

 Question
  Does immigration spur economic growth?

                     9-30
Immigration, Property Rights & Growth
               (cont'd)
 Question
  How can well-defined property rights stimulate
   economic growth?

 Answers
  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.

                       9-31
       Economic Development
 Question
  How did developed countries travel paths of growth
   from extreme poverty to relative riches?

 Development Economics
  The study of factors that contribute to the economic
   growth of a country
  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.
                            9-32
     Economic Development (cont'd)
 Putting world poverty into perspective

   At least one-half of the world’s population
    lives at subsistence level.
   20% of the world lives on less than $1 per day.
   The U.S. poverty level exceeds the average
    income of 1/2 the world.


                        9-33
     Economic Development (cont'd)

 Relationship between population growth and
  economic development
  There are nearly 7 billion people on earth.
  By 2050, according to the U.N., world population will
   be close to 9.1 billion.
  Growth will occur mainly in developing nations.



                            9-34
Figure 9-8 Expected Growth in World
    Population by 2050, Panel (a)




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




                9-36
     Economic Development (cont'd)
 The relationship between population growth and
  economic development
   Growth leads to smaller families.
   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
                            9-37
     Economic Development (cont'd)
 The stages of development
  Agricultural stage
  Manufacturing stage
  Services stage

 Keys to economic development
  Establishing a system of property rights
  Developing an educated population
  Letting “creative destruction” run its course
  Limiting protectionism
                                               9-38
  Issues and Applications: Winners and
     Losers in the Brain-Drain Game
 The losers: nations with huge outflows of human
  capital; this damages prospects for economic
  growth.
 The winners: countries receiving highly skilled
  workers who immigrate and provide a “brain-
  gain.”



                         9-39
   Figure 9-9 Nations with the Largest
Percentage Emigrations of Skilled Workers




                   9-40
   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.

                             9-41
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.
                              9-42
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.

				
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