macro-chapter 20

slowing population growth

Another reason that birth rates fall as nations become richer is that, as women achieve better access to education and jobs, their opportunity costs of raising children rise and fertility rates fall. One possible policy approach for developing countries struggling with an exploding population is to provide more equal treatment for women.

Economic growth

Economic growth is usually measured by the annual percent change in real output of goods and services per capita (real GDP per capita), reflecting the expansion of the economy over time.

rule of law

Economic growth rates tend to be higher in countries where the government enforces property rights. Property rights give owners the legal right to keep or sell their properties—land, labor, or capital. Without property rights, life would be a huge "free-for-all" where people could take whatever they wanted. Economists call the government's ability to protect private property rights and enforce contracts the rule of law.

free trade

Free trade can lead to greater output because of the principle of comparative advantage. If two nations or individuals with different resource endowments and production capabilities specialize in producing a smaller number of goods and services, then they are relatively better at and engage in trade both parties will benefit as total output rises.

natural rate of output

How much the economy will produce at its potential output, sometimes called its natural rate of output, depends on the quantity and quality of an economy's resources, including labor, capital, and natural resources.

catch-up effect.

In poor countries, where there is little capital, small increases in capital investment can lead to relatively large increases in productivity. In rich countries, where workers already have large amounts of capital, increases in capital investment may have a very small additional effect on productivity. Economists call this the catch-up effect.

"human capital"

It has become popular to view labor as "human capital" that can be augmented or improved by education and on‑the‑job training. Human capital may be more important than physical capital as a determinant of economic growth.

labor productivity

Labor productivity is defined as output per unit of worker. Sustained economic growth can only occur if the amount of output by the average worker increases.

mathusian economics

Malthus formulated a theoretical model that predicted that per capita economic growth would eventually become negative and that wages would ultimately reach equilibrium at a subsistence level, or just large enough to provide enough income to stay alive. Malthus made three assumptions: The economy was agricultural, with goods produced by two inputs, land and labor. The supply of land was fixed. Human sexual desires worked to increase population.

mathus' shortcomings

Malthus implicitly assumed there would be no technological advances and ignored the real possibility that improved technology could overcome the impact of the law of diminishing returns. The Malthusian assumption that sexual desire would necessarily lead to population increase is not accurate because the number of births can be reduced by birth control techniques. In some countries, a larger population may lead to more entrepreneurs, engineers, and scientists who will contribute to even greater economic growth through technological progress.

saving rate

One of the most important determinants of economic growth is the saving rate. In order to consume more in the future, we must save more now. Generally speaking, higher levels of saving will lead to higher levels of investment and capital formation and, therefore, to greater economic growth.

technology

Technological change allows the economy to escape the full impact of diminishing marginal returns to capital. Thus, in the long run, ceteris paribus, an economy must experience technological advance in order to improve its standard of living and overcome the diminishing marginal returns to capital.

The Rule of 70

The Rule of 70 can tell how long it will take a nation to double its output. Dividing a nation's growth rate into 70, one gets the approximate time it will take to double the income level. If a nation grows at 3.5% per year, then the economy will double every 20 years (70/3.5).

diminishing marginal returns to capital

The per-worker production function eventually becomes flatter as more capital per worker is added, that is, capital is subject to diminishing marginal returns. Some economists believe diminishing marginal returns to capital can help explain the variation in growth rates between rich and poor countries.

non-malthusian problems in developing contries

While high population growth rates may be one explanation for lower standards of living, there are many non-Malthusian explanations for the recurring poverty that exists in developing countries today: Political instability. Lack of defined and enforceable property rights. Inadequate investment in human capital