Presentation on theme: "Global Economic Growth and Development"— Presentation transcript:
1 Global Economic Growth and Development Chapter 9Global Economic Growth and Development
2 IntroductionThe Chinese government had issued relatively few patents until the mid-2000s.Since then, Chinese firms have obtained thousand of patents.Some economists suggest that those patents will help China sustain the solid economic performance it has experienced in recent years.In this chapter, you will learn about how the use of patents could contribute to a nation’s economic performance.
3 Learning Objectives Define economic growth Recognize the importance of economic growth ratesExplain why productivity increases are crucial for maintaining economic growth
4 Learning Objectives (cont'd) Describe the fundamental determinants of economic growthUnderstand the basis of new growth theoryDiscuss the fundamental factors that contribute to a nation’s economic development
5 Chapter Outline How Do We Define Economic Growth? Productivity Increases: The Heart of Economic GrowthSaving: A Fundamental Determinant of Economic GrowthNew Growth Theory and the Determinants of GrowthImmigration, Property Rights, and GrowthEconomic Development
6 Did You Know That ...An infrared camera that was originally mounted on military helicopters now has household applications?The camera has been incorporated into automobiles to enable drivers to “see” farther into the dark than was possible with standard headlights.This is just one example of innovation that many economists agree as a determinant of economic growth—the topic of this chapter.
7 How Do We Define Economic Growth? can be shown graphically by shifting the production possibilities curve outwardreflects the fact that more of all goods can be produced within the economy
8 Figure 9-1 Economic Growth Distance of shiftrepresents an increasein productive capacityDistance of shift represents an increase in productive capacity
9 How Do We Define Economic Growth? (cont'd) ObservationIndia has a real GDP more than fifteen times as large as that of DenmarkIndia’s population is about 200 times greater than that of DenmarkIndia is relatively poor and Denmark is relatively rich
10 How Do We Define Economic Growth? (cont'd) Increase in per capita real GDP measured by its rate of change per year
11 Figure 9-2 The Historical Record of U.S. Economic Growth * Author’s estimateSource: U.S. Department of Commerce.
12 International Example: Growth Rates Around the World Table 9-1 shows the average annual rate of growth of real GDP per person in selected countries since 1970.Even though the U.S. is one of the world’s richest countries, our rate of economic growth in recent decades has been in the mid-range.U.S. per capita real GDP has remained higher than other nations because we have been able to sustain growth over many decades.
13 Table 9-1 Per Capita Real GDP Growth Rates in Various Countries
14 How Do We Define Economic Growth? (cont'd) Is economic growth bad?Some psychologists contend that growth makes us worse offAs with all activities, there are costs along with benefits to growth
15 Table 9-2 Costs and Benefits of Economic Growth
16 How Do We Define Economic Growth? (cont'd) The importance of growth ratesDo we need to worry about small differences in the economic growth rate?A small difference in the rate of economic growth does not matter very much for next year or the year after, but it makes considerable difference for the more distant future due to the power of compounding
17 Table 9-3 One Dollar Compounded Annually at Different Interest Rates
18 How Do We Define Economic Growth? (cont'd) GDP in 50 years at various growth rates starting at $1 trillion3% 4% 5%$4.38trillion$7.11$11.5
19 How Do We Define Economic Growth? (cont'd) The Rule of 70A rule stating that the appropriate number of years required for per capital real GDP to double is equal to 70 divided by the average rate of economic growthExample: At an annual growth rate of 10%, per capita real GDP should double in about:
20 International Example: Tracking a Global Economic Growth Divergence Between 2007 and 2009, the rate of growth in world per capita real GDP dropped from about 6 percent to -0.5 percent.There was, however, a distinct difference in the growth rates between advanced nations, such as the United States, and developing nations, such as India.While the economic growth rate for developing nations remained positive over that period, the rate of economic growth across all advanced nations was below -3 percent by
21 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
22 Productivity Increases: The Heart of Economic Growth (cont'd) Labor ProductivityTotal real domestic output (real GDP) divided by the number of workers (output per worker) or the number of labor hoursIt increases whenever average output produced per worker (or per hour worked) during a specific time period increases
23 Figure 9-3 Factors Accounting for Economic Growth in Selected Regions
24 Saving: A Fundamental Determinant of Economic Growth Saving as a determinant of growthTo have more consumption in the future, you have to consume less today and save the difference between your consumption and your income
25 International Example: The High Chinese Saving Rate and Its Growth Implications Since the early 1970s, residents of China have increased their overall rate of saving from 35 percent to 47 percent of real GDP.The bulk of this saving has been channeled into capital investment, which today accounts for more than 45 percent of China’s total expenditures on final goods and services.These high rates of saving and investment in China help to explain the nation’s annual rate of growth of per capita real GDP in excess of 6 percent.
26 Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP
27 New Growth Theory and the Determinants of Growth A theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact
28 New Growth Theory and the Determinants of Growth (cont'd) Technology: a separate factor of productionWhen the rewards are greater, the more technological advances will occur
29 New Growth Theory and the Determinants of Growth (cont'd) Research and development (R&D)PatentsA 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)
31 Why Not … promote innovation by awarding more patents? It is already very easy to obtain a patent from the U.S. Patent and Trademark Office.The Office sometimes even accidentally awards patents to different applicants.Making patents easier to obtain would therefore not likely promote innovation but instead it would encourage more patent applicants to establish a property right through litigation instead of research and development.
32 New Growth Theory and the Determinants of Growth (cont'd) Research and development (R&D)Positive externalities and R&DFor every 1% rise in the stock of R&D in the United States alone, productivity worldwide increases by about 0.25%
33 New Growth Theory and the Determinants of Growth (cont'd) The open economy and economic growthFree trade encourages the spread of technology
34 Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade
35 International Example: What Economic Growth Success Stories Have in Common A study has found that since 1950, 13 nations had experienced 25-year periods of annual growth rates of at least 7 percent.One of the 5 characteristics common to these nations is their openness to international trade.Furthermore, the periods of high economic growth ended for several of these nations when their governments began restricting flows of international trade.
36 New Growth Theory and the Determinants of Growth (cont'd) InnovationTransforming an invention into something that is useful to humansNew growth theorists believe that real wealth creation comes from innovation – and invention is a facet of innovation
37 New Growth Theory and the Determinants of Growth (cont'd) The importance of ideas and knowledgeKnowledge, ideas, and productivity are related; ideas are what drive economic growthEconomist Paul Romer and other new growth theorists conclude that: economic growth can continue as long as we keep coming up with new ideas
38 New Growth Theory and the Determinants of Growth (cont'd) The importance of human capitalKnowledge, ideas and, productivity are all tied togetherHuman capital consists of knowledge people acquireInvesting in human capital raises living standards
39 Immigration, Property Rights, and Growth Population and immigration as they affect economic growthMIT economist Michael Kremer believes population growth drives technological progressQuestionDoes immigration spur economic growth?
40 Immigration, Property Rights, and Growth (cont'd) QuestionHow can well-defined property rights stimulate economic growth?AnswersThe more certain property rights are, the more capital accumulation there will beThe more certain are property rights, the more entrepreneurship there will be
41 Economic Development Question How did developed countries travel paths of growth from extreme poverty to relative riches?
42 Economic Development (cont'd) Development EconomicsThe study of factors that contribute to the economic growth of a countryThe goal of economists studying development is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones
43 Economic Development (cont'd) Putting world poverty into perspectiveAt least one-half of the world’s population lives at subsistence level20% of the world lives on less than $1.50 per dayThe U.S. poverty level exceeds the average income of one-half the world
44 Economic Development (cont'd) Relationship between population growth and economic developmentThere are nearly 6.5 billion people on earthBy 2050, according to the U.N., world population will be close to 9.1 billionGrowth will occur mainly in developing nations
45 Figure 9-7 Expected Growth in World Population by 2050, Panel (a)
46 Figure 9-7 Expected Growth in World Population by 2050, Panel (b)
47 Economic Development (cont'd) Relationship between population growth and economic developmentIn An Essay on the Principle of Population (1978), Thomas Robert Malthus predicted that world population growth would eventually outstrip food suppliesHe was proved wrong as the supply of food has been expanding faster than the increase in demand caused by increased population
48 Economic Development (cont'd) Relationship between population growth and economic developmentGrowth leads to smaller familiesThe more economic development occurs, the slower the population growth rateBirth rates decline with modernizationReduced infant mortalityPeople do not rely on children to take care of them in old age
49 Economic Development (cont'd) The stages of developmentAgricultural stageManufacturing stageServices stage
50 Economic Development (cont'd) Keys to economic developmentEstablishing a system of property rightsDeveloping an educated populationLetting “creative destruction” run its courseLimiting protectionism
51 You Are There: A Nonabsorbable Fat Finally Finds a Market Niche In 1968, two chemists at Procter & Gamble invented a new type of fat, olestra, which cannot be absorbed by human bodies.The company launched this calorie-free fat in 1996, but then took it off the shelves after discovering its undesirable digestive side effects.Today olestra is used as the base for a new type of paint called Sefose, which can be painted onto almost anything.
52 Issues & Applications: China Discovers the Growth Benefits of Patents Since the mid-2000s, China’s government has worked hard to enforce foreign patents and to spur innovative activity by encouraging Chinese companies to apply for patents.Applications for patents by Chinese firms have increased significantly since 2004.Since the late 2000s, Chinese companies have also obtained over 1,000 patents per year in the United States.
53 Figure 9-8 Applications for and Awards of Patents in China Since 1996
54 Summary Discussion of Learning Objectives Economic growthThe rate of economic growth is the annual rate of change in per capita GDPWhy economic growth rates are importantOver long intervals, relatively small differences in the economic growth rate can produce large disparities in per capita incomes
55 Summary Discussion of Learning Objectives (cont'd) Why productivity increases are crucial for maintaining economic growthFor a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion
56 Summary Discussion of Learning Objectives (cont'd) The key determinants of economic growthIncreases in the labor force, the growth of capital, and the growth of productivityHigher saving rates contribute to greater investment and increased capital accumulation and growthNew growth theoryEmphasizes how rewards to innovation contribute to higher growth ratesIdeas and knowledge are crucial elements
57 Summary Discussion of Learning Objectives (cont'd) Fundamental factors that contribute to a nation’s economic developmentNations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of economic development