Transcript Ch. 25 PP Notes - Mr. Lamb

CHAPTER 25
Long-Run Economic Growth
Comparing Economies Across Time and Space
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U.S. Real GDP per Capita
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Income Around the World
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Growth Rates
 How did the United States manage to produce nearly
seven times more per person in 2000 than in 1900?
 A little bit at a time.
During the twentieth century, real GDP per capita in
the United States increased an average of 1.9% each
year.
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Rule of 70
The Rule of 70 or Rule of 72 tells us that the time it
takes a variable that grows gradually over time to
double.
This is an easy way to calculate return on investment.
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Average Annual Growth Rates of Real GDP per
Capita, 1975–2003
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Long-Run Growth - Definitions:
Labor productivity, often referred to simply as
productivity, is output per worker.
Physical capital consists of human-made resources
such as buildings and machines.
Human capital is the improvement in labor created
by the education and knowledge embodied in the
workforce.
Technology is the technical means for the production
of goods and services.
Infrastructure refers to roads, bridges, power lines,
railroads, sewer systems, etc. that enable economic
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activity.
Diminishing Returns to Physical Capital
Diminishing returns to physical capital: Each
successive increase in the amount of physical capital
leads to a smaller increase in productivity.
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Example: Diminishing returns to
physical capital:
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Farmer John grows corn on 200 acres, with 1
hired hand.
Return on first tractor = HUGE!
Return on second tractor = Huge, but less than
tractor #1. (Now they both have a tractor)
Return on third tractor = less (how can two
people drive three tractors?)
Return on subsequent tractors = less, less, less.
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Physical Capital and Productivity
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Technological Progress & Productivity Growth
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What about Natural Resources?
In contrast to earlier times, in the modern world,
natural resources are a much less important determinant
of productivity than human or physical capital for the
great majority of countries.
Japan (few natural resources) = High GDP per capita
Nigeria (large oil deposits) = Low GDP per capita
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Why Growth Rates Differ
Government policies and institutions can change:
savings and investment spending
foreign investment
education
infrastructure
research and development
political stability
the protection of property rights
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Political Stability, Property Rights, and
Excessive Government Intervention
Political stability and protection of property rights are
crucial ingredients in long-run economic growth.
There’s not much point in investing in a business if
rioting mobs are likely to destroy it, or saving your
money if someone with political connections can steal
it.
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Political Stability, Property Rights, and
Excessive Government Intervention
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Even when governments aren’t corrupt,
excessive government intervention can be a
brake on economic growth.
 If large parts of the economy are supported
by government subsidies, protected from
imports, or otherwise insulated from
competition, productivity tends to suffer
because of a lack of incentives.
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Success, Disappointment, and Failure
The
growth rates of developed countries have
converged, but not the growth rates of countries across
the world.
This
has led economists to believe that the
convergence hypothesis fits the data only when
factors that affect growth, such as education,
infrastructure, and favorable policies and institutions, are
held equal across countries.
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Economics in Action: Are economies converging?
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The End of Chapter 25
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