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

2. Learning Objectives Define economic growth
Recognize the importance of economic growth rates
Explain why productivity increases are crucial for maintaining economic growth

3. 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

4. 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.

5. Figure 9-1 Economic Growth
Distance of shift
represents an increase
in productive capacity

6. How Do We Define Economic Growth? (cont'd)
Increase in per capita real GDP measured by its rate of change per year

7. Figure 9-2 The Historical Record of U.S. Economic Growth
Source: U.S. Department of Commerce.

8. 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 1990.
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.

9. Table 9-1 Per Capita Real GDP Growth Rates in Various Countries

10. 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?

11. 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.

12. Table 9-2 Costs and Benefits of Economic Growth

13. 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?

14. Table 9-3 One Dollar Compounded Annually at Different Interest Rates

15. 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

16. 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)

17. Figure 9-3 Factors Accounting for Economic Growth in Selected Regions
Source: International Monetary Fund.

18. Example: Explaining the U.S. Lead in Labor Productivity Growth
During the past decade, labor productivity has increased by about 9% in nations in the European Monetary Union, 13% in Japan, 18% in the United Kingdom, and more than 27% in the United States.
One explanation is that U.S. firms face fewer legal restrictions on opening and closing operations and hiring and firing workers.
Second, U.S. producers face more competition, which forces them to be more efficient.
Third, lower tax rates give U.S. workers greater incentives to direct more time to developing skills on the job.

19. 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.

20. Figure 9-4 Relationship Between Rate of Saving and Per Capita Real GDP
Source: World Bank.

21. 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

22. New Growth Theory and the Determinants of Growth (cont'd)
Technology: a separate factor of production
The greater the rewards, the more technological advances we will get.

23. New Growth Theory and the Determinants of 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)

24. New Growth Theory and the Determinants of 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%.

25. New Growth Theory and the Determinants of Growth (cont'd)
The open economy and economic growth
Free trade encourages the spread of technology.

26. Figure 9-5 U.S. Patent Grants
Source: U.S. Patent and Trademark Office.

27. New Growth Theory and the Determinants of Growth (cont'd)
Innovation
Transforming an invention into something that is useful to humans
New growth theorists believe that real wealth creation comes from innovation – and invention is a facet of innovation

28. New Growth Theory and the Determinants of 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.

29. New Growth Theory and the Determinants of 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.

30. Immigration, Property Rights, and Growth
Population and immigration as they affect economic growth
MIT economist Michael Kremer believes population growth drives technological progress.

31. 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.

32. Economic Development Question
How did developed countries travel paths of growth from extreme poverty to relative riches?

33. Economic Development (cont'd)
Development Economics
The study of factors that contribute to the economic growth of a country
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.

34. 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 $1.50 per day.
The U.S. poverty level exceeds the average income of one-half the world.

35. 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.

36. Figure 9-7 Expected Growth in World Population by 2050, Panel (a)
Source: United Nations.

37. Figure 9-7 Expected Growth in World Population by 2050, Panel (b)
Source: United Nations.

38. 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

39. Economic Development (cont'd)
The stages of development
Agricultural stage
Manufacturing stage
Services stage

40. 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

41. 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.

42. 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.

43. 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
Higher saving rates contribute to greater investment and increased capital accumulation and growth
New growth theory
Emphasizes how rewards to innovation contribute to higher growth rates
Ideas and knowledge are crucial elements

44. 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.