Transcript O'Sullivan, Sheffrin, Perez: Economics: Principles

Why Do Economies Grow?
PREPARED BY:
FERNANDO QUIJANO, YVONN QUIJANO,
KYLE THIEL & APARNA SUBRAMANIAN
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13.1 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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13.1 ECONOMIC GROWTH RATES
 FIGURE 13.1
What Is Economic Growth?
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13.1 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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13.1 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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13.1 ECONOMIC GROWTH RATES
Comparing the Growth Rates of Various Countries
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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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13.1 ECONOMIC GROWTH RATES
Are Poor Countries Catching Up?
 FIGURE 13.2
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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13.2 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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13.2 CAPITAL DEEPENING
How Do Population Growth, Government, and Trade Affect
Capital Deepening?
Limits to Capital Deepening
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13.3 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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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 13.3
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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13.4 WHAT CAUSES TECHNOLOGICAL PROGRESS?
Research and Development Funding
 FIGURE 13.4
Research and Development as a Percent of GDP, 1999
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13.4 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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13.4 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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13.5
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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