Transcript PPT

Why Do Economies Grow?
PREPARED BY:
FERNANDO QUIJANO, YVONN QUIJANO,
KYLE THIEL & APARNA SUBRAMANIAN
© 2007 Pearson/Prentice Hall Economics: Principles, Applications, and Tools, 5e O’Sullivan • Sheffrin • Perez
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1 How does economic growth affect social indicators such as child labor?
Increased Growth Leads to Less Child Labor in Developing Countries
2 Does economic growth necessarily cause more inequality?
Growth Need Not Cause Increased Inequality
3 How can we use economic analysis to understand the sources of growth in
different countries?
How Growth in Singapore and Hong Kong Differed
4 Why did labor productivity in the United States fall sharply during the 1970s
and 1980s?
Worldwide Factors Slowed U.S. Productivity Growth
5 How did the emergence of the Internet affect economic growth in the
United States?
The Internet and Information Technology Raised Productivity Throughout
the Economy
6 How are economic growth and health related to one another?
A Virtuous Circle: GDP and Health
7 Why are clear property rights important for economic growth in
developing countries?
Lack of Property Rights Hinders Growth in Peru
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8.1
ECONOMIC GROWTH RATES
• capital deepening
Increases in the stock of capital per worker.
• technological progress
More efficient ways of organizing economic
affairs that allow an economy to increase
output without increasing inputs.
• human capital
The knowledge and skills acquired by a
worker through education and experience
and used to produce goods and services.
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8.1
ECONOMIC GROWTH RATES
 FIGURE 8.1
What Is Economic Growth?
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Extra Application 11
‘BIOCRUDE’ FROM ALGAE BY 2010
The Department of Energy is partnering with LiveFuels Inc., a private company in
California, in a venture designed to turn algae into oil. The joint venture intends to
produce an “economically feasible” biocrude fuel from algae that would also be “low on
greenhouse gas emissions.”
• Turning algae into oil is a similar process to making soybean oil but algae has the
added benefit of being cultivated on marginal lands that are unsuitable for other types
of agriculture.
• If the venture is successful, early estimates indicate that algae biocrude could replace
all U.S. oil imports and ultimately produce biocrude for less than $60 a barrel.
Technological progress can spur economic growth.
This growth can be represented by an outward
movement of the production possibilities curve as
shown in the graph and would represent a
commensurate increase in standard of living.
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From the weird mind of me
The collective noun for a group of students
Class
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8.1
ECONOMIC GROWTH RATES
Measuring Economic Growth
• real GDP per capita
Gross domestic product per person
adjusted for changes in constant 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.
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ECONOMIC GROWTH RATES
Measuring Economic Growth
• rule of 70
A rule of thumb that says output will
double in 70/x years, where x is the
percentage rate of growth.
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8.1
ECONOMIC GROWTH RATES
Comparing the Growth Rates of Various Countries
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Extra Application 8
FIRST-QUARTER ECONOMIC GROWTH REVISED UP
The U.S. economy grew at an annual pace of 5.3% during the first quarter of 2006. The
gross domestic product (GDP) numbers were lower than initially estimated but far better
than 1.7% gains posted during the final quarter of 2005. Consumer and business
spending appear to be up overall with the largest gains coming from business spending
on equipment and software up almost 14%. Business profits were up almost 9% for the
first quarter.
• The Federal Reserve is expected to continue monitoring these results closely after
the recent increase in inflation.
• Policy-makers are particularly worried about the possibility of high energy costs
filtering through the economy in the form of higher consumer prices for all goods.
• Economic growth could stagnate as a result of consumers cutting back on spending
as fuel costs consume larger fractions of their budgets.
As businesses spend more on equipment and software
(capital), productivity per worker should increase. Typically we
see diminishing returns to this investment. Less developed
economies get a tremendous boost from additional
increments of capital while highly developed economies see a
smaller benefit.
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Extra Application 9
CHINA’S ECONOMY GROWS 8.5 PCT.
China’s growth rate slowed to 8.5 percent for the first quarter of 2006. Last year’s pace of
9.9 percent growth in the gross domestic product was too fast according to Chinese
officials. The country intends to rein in growth to a more manageable level by controlling
real estate investments through spending and lending restrictions. China’s five-year plan
calls for GDP growth to be only 7.5 percent by the year’s end.
• Most officials expect growth to exceed the target since some sectors like steel and
aluminum have excess spending.
• The country’s investment in fixed assets is only slightly lower than last year’s
increase of 25.7 percent.
Why has China’s economy grown so rapidly?
China’s rapid economic growth, fueled by a booming
domestic economy and exports to other countries, is
growing faster than the Chinese government would like
to see. As indicated in the graph, increasing demand
for Chinese goods represented by a shift in aggregate
demand (AD), should also push prices higher (i.e.
inflation).
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Extra Application 10
HUMANS WILL NEED TWO EARTHS BY 2050
The earth’s population is consuming resources faster than the earth can regenerate. A
report conducted by the World Wildlife Fund and the Global Footprint Network (GFN)
indicates that we have been over-consumptive and are currently living unsustainable
lifestyles. The report calculated that it would take about one year and three months for
the earth to regenerate the natural resources we consume in one year.
Will the time come when we really do run out of resources?
• “This ecological overshoot” is projected to continue increasing and according to the
report “humanity will be using two planets’ worth of resources by 2050.”
• The head of GFN stated “Humanity is living off its ecological credit card” and went on
to say that while possible in the short run, it was not sustainable in the long run.
• Conservation groups are hopeful that China will lead the world in environmental
responsibility among developing nations since the country has pledged “to reduce its
energy consumption by 20 percent over the next five years.”
• However, given the country’s extremely high economic growth rate, reducing energy
consumption will be a challenge.
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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 that we should think of child labor as a phenomenon
that accompanies extreme poverty and that, over time, as economies grow,
child labor will tend to disappear.
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8.1
ECONOMIC GROWTH RATES
Are Poor Countries Catching Up?
 FIGURE 8.2
Growth Rates Versus Per Capita Income, 1870–1979
• convergence
The process by which poorer
countries close the gap with
richer countries in terms of
real GDP per capita.
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8.2
CAPITAL DEEPENING
 FIGURE 8.3
Increase in the Supply of Capital
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8.2
CAPITAL DEEPENING
Saving and Investment
• saving
Income that is not consumed.
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GROWTH NEED NOT CAUSE INCREASED INEQUALITY
APPLYING THE CONCEPTS #2: Does economic growth necessarily cause
more inequality?
Economists believed that as a country develops, inequality within a
country followed an inverted “U” pattern—it initially increased as a
country developed and then narrowed over time. Recent research
casts doubt that this phenomenon is solely the result of growth:
• Inequality increased from 40 percent at the beginning of the
1920s to 45 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
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From the weird mind of me
In Venice Italy, it is illegal to sit on a sidewalk
and eat a sandwich
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8.2
CAPITAL DEEPENING
How Do Population Growth, Government, and Trade Affect
Capital Deepening?
Limits to Capital Deepening
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8.3
THE KEY ROLE OF TECHNOLOGICAL PROGRESS
How Do We Measure Technological Progress?
• growth accounting
A method to determine the contribution to
economic growth from increased capital,
labor, and technological progress.
Using Growth Accounting
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HOW GROWTH IN SINGAPORE AND HONG KONG DIFFERED
APPLYING THE CONCEPTS #3: How can we use economic analysis to understand the sources
of growth in different countries?
Singapore and Hong Kong have both had phenomenal post–World War II economic growth,
but the sources of growth in each country were very different:
• Investment was high in Singapore. Nearly all the growth was accounted for by increases
in labor and capital.
• Hong Kong had a much lower investment rate and technological progress made an
important contribution.
• Result: Residents of Hong Kong were enjoying higher consumption than residents of
Singapore were, despite the similarity in growth rates.
Concerns:
• Singapore realized it would eventually find it difficult to keep increasing inputs to
production. Economic leaders became concerned that unless they managed to increase
their rate of technological progress, their long-term growth prospects would be poor.
• Technological progress has been the driving force for growth in Hong Kong. Now that it
has become part of China, Hong Kong’s residents hope its economy will remain free
and open to sustain the system that produced technological innovation.
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WORLDWIDE FACTORS SLOWED U.S. PRODUCTIVITY GROWTH
APPLYING THE CONCEPTS #4: Why did labor productivity in the United States fall sharply
during the 1970s and 1980s?
• labor productivity
Output produced per hour of work.
 FIGURE 8.4
Real Hourly Earnings and Total Compensation for
U.S. Employees, 1964–2005
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WORLDWIDE FACTORS SLOWED U.S. PRODUCTIVITY GROWTH
APPLYING THE CONCEPTS #4: Why did labor productivity in the United States fall sharply
during the 1970s and 1980s?
The decrease in the growth of labor productivity was the primary factor behind this pattern
of real wages, because wages can rise with a growing labor force only if output per worker
continues to increase. What can explain this decrease in the growth rate?
• Declines in the education and skills of the workforce.
• Lower levels of investment, and thus a lower level of capital.
• Less spending on infrastructure, such as highways and bridges.
• Slowdown in technological progress.
• Higher worldwide energy prices.
• Many other factors.
The productivity slowdown remains a bit of a mystery despite the use of growth accounting
methods to try to explain it.
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THE INTERNET AND INFORMATION TECHNOLOGY RAISED PRODUCTIVITY THROUGHOUT
THE ECONOMY
APPLYING THE CONCEPTS #5: How did the emergence of the Internet affect economic growth in
the United States?
Higher investment in computer technology began in the mid-1980s, but until recently there
was little sign of increased productivity growth. Had the investment in information
technology finally paid off?
• Robert J. Gordon of Northwestern University was originally skeptical that we were now
operating in a “new economy” with permanently higher productivity growth.
• He found that there had been increases in technological progress.
• In subsequent studies he found that productivity growth had spread to other sectors of
the economy, suggesting that the increase was likely to be permanent.
Why did productivity growth continue to be rapid, even during the recessionary period at
the beginning of this century?
• Possible explanation: It took a substantial period of time before businesses began to
harness the use of modern computer technology and the Internet.
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8.4
WHAT CAUSES TECHNOLOGICAL PROGRESS?
Research and Development Funding
 FIGURE 8.5
Research and Development as a Percent of GDP, 1999
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8.4
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
Induced Innovations
Education, Human Capital, and the Accumulation
of Knowledge
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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 American male adult today stands at approximately 5 feet 10 inches tall,
which is nearly 4.5 inches taller than the typical Englishman in the late 18th 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.
• Led to smaller physical stature.
• Higher incidence of chronic disease.
• Limited labor productivity.
Result: 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, enabling workers to become more productive
and increase GDP even more.
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8.4
WHAT CAUSES TECHNOLOGICAL PROGRESS?
New Growth Theory
• new growth theory
Modern theories of growth
that try to explain the origins
of technological progress.
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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.
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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 titles. 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.
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capital deepening
labor productivity
convergence
new growth theory
creative destruction
real GDP per capita
growth accounting
rule of 70
growth rate
saving
human capital
technological progress
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A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.1
Diminishing Returns to Capital
Holding labor constant, increases
in the stock of capital increase
output, but at a decreasing rate.
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A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.2
Saving and Depreciation as
Functions of the Stock of Capital
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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*.
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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.
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A MODEL OF CAPITAL DEEPENING
 FIGURE 8A.5
Technological Progress and Growth
Technological progress shifts up the saving
schedule and promotes capital deepening.
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