Transcript Document

Ch. 17: Economic Growth:
Resources, Technology, and Ideas
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
What is Economic Growth?
• Absolute Real Economic Growth is an
increase in Real GDP from one period to the
next.
• Per Capita Real Economic Growth is an
increase from one period to the next in per
capita Real GDP, which is Real GDP
divided by population
Do Economic Growth Rates
Matter?
• If a country has a 3 percent annual growth rate, Real GDP
will take 24 years to double; If a country has a 4 percent
annual growth rate, Real GDP will take 18 years to double.
Two Types of Economic Growth
• Economic Growth from an Inefficient Level of
Production
Two Types of Economic Growth
• Economic Growth from an Efficient Level of
Production
Economic Growth and the Price
Level
• Economic Growth can
occur with a falling
price level, rising price
level, or stable price
level.
• In recent decades, the
US economy has
witnessed economic
growth with a rising
price level.
What Causes Economic Growth?
• Natural Resources: Countries rich in natural
resources are not guaranteed economic growth and
countries poor in natural resources may grow. It is
still more likely for a country with natural
resources to grow.
• Labor: It is possible to produce more output, but
whether or not the average productivity of labor
rises, falls or stays constant depends on how
productive the additional workers are relative to
existing workers. One way to achieve increased
productivity is through education, training, and
experience.
What Causes Economic Growth?
• Capital: To produce more capital goods, which
are not directly consumable, present consumption
must be reduced. As the saving rate increases,
capital formation increases, and so does economic
growth.
• Technological Advances: Technological advances
usually come as a result of companies and a
country investing in research and development (R
& D).
Investment and Per Capita Real
Economic Growth for Selected
Countries
Free Trade As Technology
• There is really no
difference between a
machine that can turn
wheat into cars and
free trade between
countries.
• This is exactly what
happens when we
trade American wheat
for Japanese cars.
Property Rights Structure
• Per Capita Real economic growth first appeared in
areas that had developed a system of institutions
and property rights that encouraged individuals to
direct their energies to effective economic
projects.
• Individuals will invest more, take more risks, and
work harder when the property rights structure
allows them to keep more of the monetary rewards
of their investing, risk taking, and labor.
Economic Freedom
• Some economists believe
that economic freedom
leads to economic growth.
• The data show that
economic freedom and
Real GDP per capita are
correlated.
• Some economists believe
there is a “cause and
effect” relationship.
Policies to Promote Economic
Growth
• When the economy is situated below its PPF,
demand inducing expansionary monetary or fiscal
policy is often advocated.
• There are supply-side policies too.
• These factors include natural resources, labor,
increases in human capital, increases in physical
capital investment, technological advances, and
property rights structures.
• Any policies that promote these factors promote
economic growth.
Tax Policy
• Some propose cutting taxes on such
activities as working and saving in order to
increase the productive capacity of the
economy.
• Others argue that if the tax is lowered on
income placed in saving accounts, the return
from saving will increase and thus the
amount of saving will rise.
Regulator Policy
• Some say that some
government regulations
increase the cost of
production for business
and consequently reduce
output.
• Economists who believe
the benefits do not warrant
the costs often argue for
some form of
deregulation.
What About Industrial Policy?
• Industrial policy is a deliberate government policy of
aiding those industries that are most likely to succeed in
the world marketplace.
• Government needs to work with business firms in the
private sector to help them compete in the world
marketplace.
• Critics maintain industrial policy does not always turn
out the way its proponents would have for 3 reasons:
government may favor industries with more political
influence; officials who design policy don’t know what
will be industries of the future; officials are likely to
hamper growth if they aid certain industries.
Worries about Future Economic
Growth
What are the Costs of
Growth?
• More pollution, more
factories, more crowded
cities, more emphasis on
material goods, more
stress, more psychological
problems, more suicides,
more drug abuse, and so
on.
• But is there direct
evidence of these costs?
What is the relationship
between economic
growth and availability
of resources?
• Continued economic
growth leads to continued
population growth and
threatens survival of the
human race by stripping
us of our resources
• Based on unrealistic
assumptions, oversights,
or flimsy evidence?
Q&A
• “Economic Growth refers to an increase in
GDP.” Comment.
• Country A has witnessed both economic
growth and a rising price level during the
past two decades. What does this imply
about the LRAS and AD curves?
• How can capital investment promote
economic growth
Two Worries About Future
Economic Growth
• Some individuals argue that more economic
growth comes with more pollution, more factories,
more crowded cities, more emphasis on material
goods and getting ahead, more rushing around,
more psychological problems, more people using
drugs, more suicides, and so on.
• Some people believe continued economic and
population growth threatens the survival of the
human race because this growth will hasten the
time when the world runs out of resources.
New Growth Theory
• Technology is a central part of the economic
system.
• The amount and quality of technology that is
developed depends on the amount of resources we
devote to it.
• If one person is trying to advance technology, his
or her chances of success are much smaller than if
hundreds or thousands of persons are trying.
• The theory also places emphasis on the process of
discovering and formulating ideas.
Discovery, Ideas, and Institutions
• If the process of
discovering ideas is
important to economic
growth, then it
behooves us to figure
out ways to promote
the discovery process.
• Employee flexibility is
becoming a larger part
of the US economy.
Expanding Our Horizons
• “Economic Growth occurs
whenever people take
resources and rearrange
them in ways that are
more valuable.”
• If we believe ideas are
important to economic
growth, then we need to
have ideas as to how to
generate more ideas: these
are meta-ideas.
Q&A
• What are two worries about future
economic growth?
• If technology is endogenous, what are the
implications for economic growth?
• According to new growth theory, what
countries will be the countries that grow the
fastest in the next century?