1. Global Economic Growth and Development
Chapter 9
Global Economic Growth and Development

2. Introduction
About half of all U.S. engineers and computer scientists with Ph.D. degrees were born outside the United States.
In this chapter, you will learn why countries that attract and retain the world’s brainiest and hardest-working people tend to experience the highest sustained rates of economic growth.
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3. Learning Objectives Define economic growth
Recognize the importance of economic growth rates
Explain why productivity increases are crucial for maintaining economic growth
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4. Learning Objectives (cont'd)
Describe the fundamental determinants of economic growth
Understand the basis of new growth theory
Discuss the fundamental factors that contribute to a nation’s economic development
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5. Chapter Outline How Do We Define Economic Growth?
Productivity Increases: The Heart of Economic Growth
Saving: A Fundamental Determinant of Economic Growth
New Growth Theory and the Determinants of Growth
Immigration, Property Rights, and Growth
Economic Development
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6. Did You Know That...
Only one European nation, Luxembourg, has per capita real GDP higher than the U.S. per capita GDP?
Per capita GDP has grown more rapidly in some U.S. states than in some European nations?
These states have experienced a higher rate of economic growth?
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7. How Do We Define Economic Growth?
Economic growth can be shown graphically by shifting the production possibilities curve outward.
Economic growth reflects the fact that more of all goods can be produced within the economy.
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8. Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity
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9. How Do We Define Economic Growth? (cont'd)
Observation
India has a real GDP more than fifteen times as large as that of Denmark.
India’s population is about 200 times greater than that of Denmark.
India is relatively poor and Denmark is relatively rich.
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10. How Do We Define Economic Growth? (cont'd)
Increase in per capita real GDP measured by its rate of change per year
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11. Figure 9-2 The Historical Record of U.S. Economic Growth
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12. Table 9-1 Per Capita Real GDP Growth Rates in Various Countries
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13. How Do We Define Economic Growth? (cont'd)
Question
If your leisure time increases 1 hour/week and your commute time to work increases by 2 hours/week, are you better off?
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14. How Do We Define Economic Growth? (cont'd)
Is economic growth bad?
Some psychologists contend that growth makes us worse off.
As with all activities there are costs along with benefits to growth.
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15. Table 9-2 Costs and Benefits of Economic Growth
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16. How Do We Define Economic Growth? (cont'd)
The importance of growth rates
Do we need to worry about small differences in the economic growth rate?
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17. Table 9-3 One Dollar Compounded Annually at Different Interest Rates
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18. How Do We Define Economic Growth? (cont'd)
GDP in 50 years at various growth rates starting at $1 trillion
3% 4% 5%
$4.38
trillion
$7.11
$11.5
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19. 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
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20. Productivity Increases: The Heart of Economic Growth (cont'd)
Labor Productivity
Total real domestic output (real GDP) divided by the number of workers (output per worker)
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21. Figure 9-3 Factors Accounting for Economic Growth in Selected Regions
Sources: U.S. Department of Commerce; U.S. Department of Labor, Bureau of Labor Statistics
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22. Example: Is Official Labor Productivity Growth Overstated?
BLS reports U.S. labor productivity has increased by at least 21% since 2000.
Self-employed people, managers, part-time, and temporary employees are excluded.
Including these forms of labor might reduce productivity to as low as 11%.
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23. Saving: A Fundamental Determinant of Economic Growth
To have more consumption in the future, you must consume less today and save the difference between your consumption and your income.
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24. Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP
Source: World Bank
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25. New Growth Theory and What Determines 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
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26. New Growth Theory and What Determines Growth (cont'd)
Technology: a separate factor of production
The greater the rewards, the more technological advances we will get.
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27. New Growth Theory and What Determines Growth (cont'd)
Research and development (R&D)
Patents
A 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)
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28. New Growth Theory and What Determines Growth (cont'd)
Research and development (R&D)
Positive externalities and R&D
For every 1% rise in the stock of R&D in the United States alone, productivity worldwide increases by about 0.25%.
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29. New Growth Theory and What Determines Growth (cont'd)
The open economy and economic growth
Free trade encourages the spread of technology.
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30. Figure 9-5 U.S. Patent Grants
Source: World Bank
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31. New Growth Theory and What Determines Growth (cont'd)
Innovation
Transforming an invention into something that is useful to humans
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32. Figure 9-6 The Relationship Between Economic Growth and Tariff Barriers to International Trade
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33. New Growth Theory and What Determines Growth (cont'd)
The importance of ideas and knowledge
Knowledge, ideas, and productivity are related; ideas are what drive economic growth.
Economist Paul Romer suggests that growth can continue as long as we come up with new ideas.
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34. Figure 9-7 The Winnowing Process of Research and Development
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35. New Growth Theory and What Determines Growth (cont'd)
The importance of human capital
Knowledge, ideas and, productivity are all tied together.
Human capital consists of knowledge people acquire.
Investing in human capital raises living standards.
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36. Immigration, Property Rights, and Growth
Population and immigration as they affect economic growth
MIT economist Michael Kremer believes population growth drives technological progress.
Question
Does immigration spur economic growth?
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37. Immigration, Property Rights, and Growth (cont'd)
Question
How can well-defined property rights stimulate economic growth?
Answers
The more certain property rights are, the more capital accumulation there will be.
The more certain are property rights, the more entrepreneurship there will be.
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38. Economic Development Question
How did developed countries travel paths of growth from extreme poverty to relative riches?
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39. Economic Development (cont'd)
Development Economics
The study of factors that contribute to the economic growth of a country
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40. Economic Development (cont'd)
The goal of development economists is to help the 4 billion people with low living standards to join the 2 billion people with moderately high ones.
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41. Economic Development (cont'd)
Putting world poverty into perspective
At least one-half of the world’s population lives at subsistence level.
20% of the world lives on less than $1 per day.
The U.S. poverty level exceeds the average income of one-half the world.
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42. Economic Development (cont'd)
Relationship between population growth and economic development
There are nearly 7 billion people on earth.
By 2050, according to the U.N., world population will be close to 9.1 billion.
Growth will occur mainly in developing nations.
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43. Figure 9-8 Expected Growth in World Population by 2050, Panel (a)
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44. Figure 9-8 Expected Growth in World Population by 2050, Panel (b)
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45. Economic Development (cont'd)
The relationship between population growth and economic development
Growth leads to smaller families.
The more economic development occurs, the slower the population growth rate.
Birth rates decline with modernization.
Reduced infant mortality
People do not rely on children to take care of them in old age
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46. Economic Development (cont'd)
The stages of development
Agricultural stage
Manufacturing stage
Services stage
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47. Economic Development (cont'd)
Keys to economic development
Establishing a system of property rights
Developing an educated population
Letting “creative destruction” run its course
Limiting protectionism
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48. Issues and Applications: Winners and Losers in the Brain-Drain Game
The losers: nations with huge outflows of human capital; this damages prospects for economic growth.
The winners: countries receiving highly skilled workers who immigrate and provide a “brain-gain.”
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49. Figure 9-9 Nations with the Largest Percentage Emigrations of Skilled Workers
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50. Summary Discussion of Learning Objectives
Economic growth
The rate of economic growth is the annual rate of change in per capita GDP.
Why economic growth rates are important
Over long intervals, relatively small differences in the economic growth rate can produce large disparities in per capita incomes.
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51. Summary Discussion of Learning Objectives (cont'd)
Why productivity increases are crucial for maintaining economic growth
For a nation with a stable population and steady capital growth, productivity growth is the main factor in economic expansion.
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52. Summary Discussion of Learning Objectives (cont'd)
The key determinants of economic growth
Increases in the labor force, the growth of capital, and the growth of productivity
New growth theory
Emphasizes how rewards to innovation contribute to higher growth rates
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53. Summary Discussion of Learning Objectives (cont'd)
Fundamental factors that contribute to a nation’s economic development
Nations that encourage education, have a strong system of property rights, allow creative destruction, and avoid protectionism have higher levels of economic development.
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54. Global Economic Growth and Development
End of Chapter 9
Global Economic Growth and Development