1. © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. Fernando & Yvonn Quijano Prepared by: Chapter 22 Long-Run Economic Growth: Sources and Policies

2. © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 2 of 35 MySpace Meets the Chinese Economic Miracle 22.1Define economic growth, calculate economic growth rates, and describe global trends in economic growth. 22.2Use the economic growth model to explain why growth rates differ across countries. 22.3Discuss fluctuations in productivity growth in the United States. 22.4Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth. 22.5Discuss government policies that foster economic growth. Learning Objectives …per capita GDP in China will double every eight years.

3. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 3 of 35 Economic Growth Over Time and Around the World Industrial Revolution The application of mechanical power to the production of goods, beginning in England around 1750. Economic Growth from 1,000,000 B.C. to the Present Learning Objective 22.1

4. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 4 of 35 Learning Objective 22.3 Why Did the Industrial Revolution Begin in England? Making the Connection The British government’s guarantee of property rights set the stage for the Industrial Revolution.

5. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 5 of 35 Learning Objective 22.1 FIGURE 22-1 Average Annual Growth Rates for the World Economy Economic Growth Over Time and Around the World Economic Growth from 1,000,000 B.C. to the Present

6. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 6 of 35 In the long run, small differences in economic growth rates result in big differences in living standards. Learning Objective 22.1 Why Do Growth Rates Matter? Growth rates matter because an economy that grows too slowly fails to raise living standards. Don’t Let This Happen to YOU! Don’t Confuse the Average Annual Percentage Change with the Total Percentage Change Economic Growth Over Time and Around the World Small Differences in Growth Rates Are Important

7. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 7 of 35 Learning Objective 22.1 The Benefits of an Earlier Start: Standards of Living in China and Japan Making the Connection Sustained high rates of economic growth have helped Japan attain high living standards. CHINAJAPAN Life expectancy at birth72.5 years82.3 years Infant mortality (per 1,000 live births)233 Percentage of the population surviving on less than $2 per day35%0% Percentage of the population with access to improved water source77%100% Percentage of the population with access to improved sanitation44%100% Internet users per 1,000 people85668

8. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 8 of 35 Learning Objective 22.1 FIGURE 22-2 GDP per Capita, 2007 Economic Growth Over Time and Around the World “The Rich Get Richer and... ”

9. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 9 of 35 What Determines How Fast Economies Grow? Economic growth model A model that explains growth rates in real GDP per capita over the long run. Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work. Technological change A change in the quantity of output a firm can produce using a given quantity of inputs. Learning Objective 22.2

10. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 10 of 35 What Determines How Fast Economies Grow? Better machinery and equipment. Increases in human capital. Learning Objective 22.2 There are three main sources of technological change: Human capital The accumulated knowledge and skills that workers acquire from education and training or from their life experiences. Better means of organizing and managing production.

11. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 11 of 35 Per-worker production function The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant. Learning Objective 22.2 What Determines How Fast Economies Grow? The Per-Worker Production Function FIGURE 22-3 The Per-Worker Production Function

12. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 12 of 35 Learning Objective 22.2 Technological change helps economies avoid diminishing returns to capital. What Determines How Fast Economies Grow? Which Is More Important for Economic Growth: More Capital or Technological Change?

13. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 13 of 35 Learning Objective 22.2 FIGURE 22-4 Technological Change Increases Output per Hour Worked What Determines How Fast Economies Grow? Technological Change: The Key to Sustaining Economic Growth

14. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 14 of 35 Learning Objective 22.2 What Explains the Economic Failure of the Soviet Union? Making the Connection The fall of the Berlin Wall in 1989 symbolized the failure of Communism.

15. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 15 of 35 Solved Problem 22-2 Using the Economic Growth Model to Analyze the Failure of the Soviet Union’s Economy Learning Objective 22.2

16. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 16 of 35 Learning Objective 22.2 New growth theory A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system. What Determines How Fast Economies Grow? New Growth Theory

17. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 17 of 35 Learning Objective 22.2 Protecting intellectual property with patents and copyrights. Patent The exclusive right to a product for a period of 20 years from the date the product is invented. Subsidizing research and development. Subsidizing education. What Determines How Fast Economies Grow? New Growth Theory Government policy can help increase the accumulation of knowledge capital in three ways:

18. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 18 of 35 Learning Objective 22.2 Schumpeter developed a model of growth that emphasized his view that new products unleash a “gale of creative destruction” in which older products— and, often, the firms that produced them—are driven out of the market. What Determines How Fast Economies Grow? Joseph Schumpeter and Creative Destruction

19. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 19 of 35 Learning Objective 22.3 FIGURE 22-5 Average Annual Growth Rates in Real GDP per Hour Worked in the United States Economic Growth in the United States Economic Growth in the United States since 1950: Fast, Then Slow, Then Fast Again

20. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 20 of 35 Measurement problems High oil prices A decline in labor quality Learning Objective 22.3 Was It a Measurement Problem? Was It the Effect of High Oil Prices? Was It the Declining Quality of Labor? The Productivity Slowdown Affected All Industrial Countries Economic Growth in the United States What Caused the Productivity Slowdown of 1973–1994?

21. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 21 of 35 Learning Objective 22.3 Why Has Productivity Growth Been Faster in the United States than in Other Countries? FIGURE 22-6 Productivity Growth in the Leading Industrial Economies, 1996–2007 Economic Growth in the United States The Productivity Boom: Are We in a “New Economy”?

22. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 22 of 35 Why Isn’t the Whole World Rich? Learning Objective 22.4 FIGURE 22-7 The Catch-up Predicted by the Economic Growth Model Catch-up: Sometimes, but Not Always Catch-up The prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.

23. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 23 of 35 Learning Objective 22.4 FIGURE 22-8 There Has Been Catch-up among Industrial Countries Catch-up Among the Industrial Countries Why Isn’t the Whole World Rich? Catch-up: Sometimes, but Not Always

24. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 24 of 35 Learning Objective 22.4 FIGURE 22-9 Most of the World Hasn’t Been Catching Up Are the Developing Countries Catching Up to the Industrial Countries? Why Isn’t the Whole World Rich? Catch-up: Sometimes, but Not Always

25. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 25 of 35 Solved Problem 22-4 The Economic Growth Model’s Prediction of Catch-up Learning Objective 22.4 COUNTRY REAL GDP PER CAPITA IN 1960 (2000 DOLLARS) ANNUAL GROWTH IN REAL GDP PER CAPITA, 1960–2004 Taiwan$1,4436.26% Tunisia2,1023.13 Brazil2,6432.36 Algeria3,8431.04 Argentina7,8380.76 COUNTRY REAL GDP PER CAPITA IN 1960 (2000 DOLLARS) ANNUAL GROWTH IN REAL GDP PER CAPITA, 1960–2004 Japan$4,5093.94% Italy7,1672.70 France8,5312.58 United Kingdom10,3232.19

26. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 26 of 35 Why Isn’t the Whole World Rich? Learning Objective 22.4 Why Don’t More Low-Income Countries Experience Rapid Growth? Property rights The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Failure to Enforce the Rule of Law Rule of law The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

27. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 27 of 35 Learning Objective 22.4 Failure to Enforce the Rule of Law FIGURE 22-10 The Rule of Law and Growth Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth?

28. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 28 of 35 Learning Objective 22.4 Wars and Revolutions Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth? Wars have made it impossible for countries such as Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo to accumulate capital or adopt new technologies.

29. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 29 of 35 Learning Objective 22.4 Poor Public Education and Health Low Rates of Saving and Investment Why Isn’t the Whole World Rich? Why Don’t More Low-Income Countries Experience Rapid Growth? 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. The low savings rates in developing countries contribute to a vicious cycle of poverty.

30. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 30 of 35 Why Isn’t the Whole World Rich? Learning Objective 22.4 The Benefits of Globalization Foreign portfolio investment The purchase by an individual or a firm of stock or bonds issued in another country. Globalization The process of countries becoming more open to foreign trade and investment. Foreign direct investment (FDI) The purchase or building by a corporation of a facility in a foreign country.

31. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 31 of 35 Why Isn’t the Whole World Rich? Learning Objective 22.4 The Benefits of Globalization FIGURE 22-11 Globalization and Growth

32. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 32 of 35 Learning Objective 22.4 Globalization and the Spread of Technology in Bangladesh Making the Connection The spread of technology spurred Bangladesh’s booming clothing industry.

33. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 33 of 35 Growth Policies Learning Objective 22.5 Enhancing Property Rights and the Rule of Law Improving Health and Education Policies with Respect to Technology Policies with Respect to Saving and Investment Is Economic Growth Good or Bad? We have seen that even small differences in growth rates compounded over the years can lead to major differences in standards of living. Therefore, there is potentially a very high payoff to government policies that increase growth rates.

34. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 34 of 35 An Inside LOOK Entrepreneurship and Sustained Economic Growth in Europe Feeling Brighter Figure 1. To increase output per worker during the aftermath of World War II, Europe increased capital per worker. Figure 2. To increase output per worker today, Europe must find new and innovative ways to produce.

35. Chapter 22: Long-Run Economic Growth: Sources and Policies © 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 35 of 35 Catch-up Economic growth model Foreign direct investment (FDI) Foreign portfolio investment Globalization Human capital Industrial Revolution Labor productivity K e y T e r m s New growth theory Patent Per-worker production function Property rights Rule of law Technological change