c h a p t e r ten © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn Quijano Long-Run Economic Growth: Sources and Policies

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 2 of 36 Economic Growth Over Time and Around the World Industrial Revolution The application of mechanical power to the production of goods, beginning in England around LEARNING OBJECTIVE 1 Economic Growth from 1,000,000 B.C. to the Present

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 3 of 36 Economic Growth Over Time and Around the World Average Annual Growth Rates for the World Economy Small Differences in Growth Rates Are Important

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 4 of 36 The Benefits of an Earlier Start: Standards of Living in China and Japan If rapid economic growth continues in China, its standard of living will begin to approach those in the United States and Japan. CHINAJAPAN Life expectancy at birth71.5 years81.9 years Infant mortality (per 1,000 live births)303 Percentage of the population surviving on less than $2 per day47%0% Percentage of the population with access to treated water77%100% Percentage of the population with access to improved sanitation44%100%

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 5 of 36 Economic Growth Over Time and Around the World Why Do Growth Rates Matter? Growth rates matter because an economy that grows too slowly fails to raise living standards. “The Rich Get Richer and …” In the 1980s and 1990s, a small group of countries, mostly East Asian countries such as South Korea, Taiwan, and Singapore, experienced high rates of growth and are sometimes referred to as the newly industrializing countries.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 6 of 36 What Determines How Fast Economies Grow? LEARNING OBJECTIVE 2 Economic growth model A model that explains changes in real GDP per capita in the long run. Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work. Economists believe two key factors determine labor productivity: the quantity of capital per hour worked and the level of technology.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 7 of 36 What Determines How Fast Economies Grow? Technological change Change in the ability of a firm to produce a given level of output with a given quantity of inputs There are three main sources of technological change:  Better machinery and equipment.  Increases in human capital.  Better means of organizing and managing production.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 8 of 36 What Determines How Fast Economies Grow? The Per-Worker Production Function Per-worker production function The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant. Human capital The accumulated knowledge and skills that workers acquire from education and training, or from their life experiences.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 9 of 36 What Determines How Fast Economies Grow? The Per-Worker Production Function The Per-Worker Production Function

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 10 of 36 What Determines How Fast Economies Grow? Which Is More Important for Economic Growth: More Capital or Technological Change? Technological Change: The Key to Sustaining Economic Growth Technological Change Increases Output per hour worked

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 11 of 36 What Determines How Fast Economies Grow? Endogenous Growth Theory Endogenous growth theory A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives, and so is determined by the working of the market system. Patent The exclusive right to a product for a period of 20 years from the date the product was invented.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 12 of 36 What Determines How Fast Economies Grow? Government policy can help increase the accumulation of knowledge capital in three ways:  Protecting intellectual property with patents and copyrights.  Subsidizing research and development.  Subsidizing education.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 13 of 36 Economic Growth in the United States The Productivity Boom: Are We in a “New Economy”? The Contribution of Information Technology to Growth in Real GDP

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 14 of 36 The Economic Growth Model’s Predictions of Catch-Up 10-2 LEARNING OBJECTIVE 4 COUNTRY REAL GDP PER CAPITA IN 1960 (1996 DOLLARS) GROWTH IN REAL GDP PER CAPITA, Botswana$ % Thailand1, Sri Lanka1, Ecuador2, Guatemala2, COUNTRY REAL GDP PER CAPITA IN 1960 (1996 DOLLARS) GROWTH IN REAL GDP PER CAPITA, Japan$4, % Norway8, The Netherlands9, United Kingdom9,

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 15 of 36 Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth? There is no one answer, but most economists point to four key factors:  Failure to enforce the rule of law  Wars and revolutions  Poor public education and health  Low rates of saving and investment

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 16 of 36 Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth? POOR PUBLIC EDUCATION AND HEALTH Many low-income countries have weak public school systems, so many workers are unable to read and write. People who are sick work less and are less productive when they do work. LOW RATES OF SAVING AND INVESTMENT The low savings rates in developing countries contribute to a vicious cycle of poverty.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 17 of 36 Why Isn’t the Whole World Rich? The Benefits of Globalization Foreign direct investment The purchase or building by a corporation of a facility in a foreign country. Foreign portfolio investment The purchase by an individual or firm of stock or bonds issued in another country. Globalization The process of countries becoming more open to foreign trade and investment.

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 10: Long-run Economic Growth: Sources and Policies 18 of 36 Catch-up Economic growth model Endogenous growth theory Foreign direct investment (FDI) Foreign portfolio investment Globalization Human capital Organization Capital Industrial Revolution Labor productivity Patent Per-worker production function Technological change