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Slope on logarithmic scale = Rate of Real GDP Growth Growth Slowdown 1948-70 growth rate > 1970+ growth rate 1981 - 2007 Great Moderation Slide 2 Long-run economic growth The process by which rising productivity increases the average standard of living. The Growth in Real GDP per Capita, US, 19002006 Calculating Growth Rates and the Rule of 70 8-fold increase in 106 years 2% annual growth in real gdp per capita Slide 3 The Connection between Economic Prosperity and Health Making the Connection Slide 4 4 of 26 Income and Happiness Happiness and Income per Person across Countries Slide 5 What Determines the Rate of Long-Run Growth? Capital Manufactured goods that are used to produce other goods and services. Increases in Capital per Hour Worked Technological Change: an increase in the output that can be produced using a given quantity of inputs. Economic growth depends more on technological change than on increases in capital per hour worked. Growth driven by capital accumulation eventually peters out Witness Singapore Witness the former Soviet Union Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work. Slide 6 Saving, Investment, and the Financial System Financial system Financial markets and financial intermediaries through which firms acquire funds from households. The Macroeconomics of Saving and Investment Y = C + I + G + NX I = Y C G NX Recall: NX = Capital Inflows Y Net Taxes C = S private Net Taxes G = S public So: I = S private + S public + Capital Inflows National Saving Capital Accumulation Slide 7 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 In the long run, small differences in economic growth rates result in big differences in living standards. Slide 8 Why Did the Industrial Revolution Begin in England? The Glorious Revolution,1688 Guarantee of property rights precondition for accumulation It aint culture Unlike the Spanish in Mexico and South America, the English didnt find many Indians to enslave in North America They had to give British settlers in North America incentives to be productive Slide 9 GDP per Capita, 2006 Economic Growth Over Time and Around the World The Rich Get Richer and... Slide 10 What Explains Rapid Economic Growth in Botswana While the Rest of Sub-Saharan Africa Languishes? Diamonds...but also Political stability Protection of property rights Rule of law Slide 11 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. The more capital each worker has, the more productive she will be. Technological change A change in the quantity of output a firm can produce using a given quantity of inputs. Slide 12 The Per-Worker Production Function Output per worker is a decreasing function of capital per worker There are diminishing returns to capital Slide 13 Why Isnt the Whole World Rich? If poor countries are poor because of little capital per worker, equal increments of capital should be more productive in poor than in rich countries catch-up and convergence 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. Slide 14 FIGURE 10-8 There Has Been Catch-up among Industrial Countries Catch-up Among the Industrial Countries Why Isnt the Whole World Rich? Catch-up: Sometimes, but Not Always Slide 15 Convergence in Output/Capita? The OECD Slide 16 Looking Across Lots of Countries Convergence ??? Slide 17 Looking Across Countries A Closer Look Conditional convergence Human capital Geography and resources Institutions: Rule-of-law/property rights/finance Slide 18 What Determines How Fast Economies Grow? Better machinery and equipment. Increases in human capital. 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. Technology - technology - technology Slide 19 Technological Change Increases Output per Hour Worked What Determines How Fast Economies Grow? Technological Change: The Key to Sustaining Economic Growth Slide 20 Using the Economic Growth Model to Analyze the Failure of the Soviet Unions Economy Stalinist growth: Continually increase saving rate Slide 21 The Economic Growth Models Prediction of Catch-up COUNTRY REAL GDP PER CAPITA IN 1960 (2000 DOLLARS) ANNUAL GROWTH IN REAL GDP PER CAPITA, 19602004 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, 19602004 Japan$4,5093.94% Italy7,1672.70 France8,5312.58 United Kingdom10,3232.19 Slide 22 Why Isnt the Whole World Rich? Why Dont 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. 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. Poor Public Education and Health Low Rates of Saving and Investment Slide 23 Failure to Enforce the Rule of Law Why Isnt the Whole World Rich? Why Dont More Low-Income Countries Experience Rapid Growth? Slide 24 Why Isnt the Whole World Rich? 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 Openness technology transfer...if developing country has the human capital to absorb advanced technology Foreign direct investment (FDI) The purchase or building by a corporation of a facility in a foreign country. Slide 25 Globalization and the Spread of Technology in Bangladesh The spread of technology spurred Bangladeshs booming clothing industry. Slide 26 Protecting intellectual property with patents and copyrights. Subsidizing research and development. Subsidizing education. What Determines How Fast Economies Grow? Government policy can help increase the accumulation of knowledge capital in three ways: Joseph Schumpeter and Creative Destruction Schumpeter: new products unleash a gale of creative destruction older products and firms are driven out of the market. Slide 27 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 Slide 28 Was It a Measurement Problem? Was It the Effect of High Oil Prices? Was It the Declining Quality of Labor? Was It the Increased Important of Services? Was It Absence of a Break-Through Product? The Productivity Slowdown Affected All Industrial Countries Economic Growth in the United States What Caused the Productivity Slowdown of 19731994? Slide 29 Why Has Productivity Growth Been Faster in the United States than in Other Countries? FIGURE 10-6 Productivity Growth in the Leading Industrial Economies, 19962006 Economic Growth in the United States The Productivity Boom: Are We in a New Economy?