1. Chapter 3 Slide 1 Copyright © 2003 Pearson Education, Inc. The Economics of Growth: n Physical capital accumulation n Human capital investment n Population and labor force growth n Technological Advance –Labor saving technology –Capital saving technology –Labor augmenting technology –Capital augmenting technology

2. Chapter 3 Slide 2 Copyright © 2003 Pearson Education, Inc. Increases in Physical and Human Resources and the Production Possibility Frontier: Growth and Development in Pictures

3. Chapter 3 Slide 3 Copyright © 2003 Pearson Education, Inc. Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier

4. Chapter 3 Slide 4 Copyright © 2003 Pearson Education, Inc. Economic Growth and Development n Sustained rise in national output and ability to provide a wide range of ever-improving goods and services. n Technological advance is necessary but not sufficient. n Need social innovation to realize technology’s potential.

5. Chapter 3 Slide 5 Copyright © 2003 Pearson Education, Inc. The Historical Record: Characteristics of Modern Economic Growth n High rates of per capita income and population growth n High rates of total factor productivity increase

6. Chapter 3 Slide 6 Copyright © 2003 Pearson Education, Inc. * Factor Accumulation Accounts for Only a Fraction of Growth. * Productivity Increase Accounts for the Rest.

7. Chapter 3 Slide 7 Copyright © 2003 Pearson Education, Inc. Characteristics of Modern Economic Growth n High rates of per capita income and population growth n High rates of total factor productivity increase n High rates of economic structural transformation Physical Object Gap (machines) n High rates of social, political, and ideological transformation n International economic outreach n Virtuous circles of growth Ingenuity Gap (ideas)

8. Chapter 3 Slide 8 Copyright © 2003 Pearson Education, Inc. Explaining Growth: the usual suspects n Physical and human resource endowments –ACCUMULATE! –EDUCATE! n Relative levels of per capita income and GNP –Expect CONVERGENCE

9. Chapter 3 Slide 9 Copyright © 2003 Pearson Education, Inc. Convergence among OECD Countries but Divergence in the World as a Whole

10. Chapter 3 Slide 10 Copyright © 2003 Pearson Education, Inc. Convergence among OECD Countries but Divergence in the World as a Whole cont’d

11. Chapter 3 Slide 11 Copyright © 2003 Pearson Education, Inc. Explaining Growth and (Lack of ) Development: Endowments n Climate/geography/primary goods –Bananas, tin n Diseased environment  EXTRACTIVE INSTITUTIONS Acemeglu, Johnson, Robinson

12. Chapter 3 Slide 12 Copyright © 2003 Pearson Education, Inc. Explaining Growth and (Lack of) Development: Lousy Policies n Autarchy vs. Openness –Labor mobility …immigration n Gov’t SIZE/Inflation n Price Distortions n Financial Repression vs. Financial Development n Instability –Civil war/coups/ETHNIC DIVERSITY/Inequality n Legal Origin –French collectivism vs. Anglo individualism

13. Chapter 3 Slide 13 Copyright © 2003 Pearson Education, Inc. Concepts for Review n Brain drain n Capital accumulation n Capital-augmenting technological progress n Capital-saving technological progress n Capital stock n Dualism n Economic growth n Economic planning n Equalization (economic and social) n Free trade n Human capital n Infrastructure

14. Chapter 3 Slide 14 Copyright © 2003 Pearson Education, Inc. Concepts for Review, cont’d n Labor-augmenting technological progress n Labor-saving technological progress n Modernization ideals n Neutral technological progress n Production possibility curve n Rationality n Research and Development (R&D) n Technological progress n Terms of trade n Total factor productivity (TFP)