Chapter 22: Long Run Economic Growth: Sources and Policies

Types of Countries

1) Developed Countries: Australia, Canada, New Zealand, US, Japan 2) Developing Countries: Most of the countries in Africa, Asia, and Latin America 3) Newly Industrializing Countries: Singapore, Taiwan, South Korea, etc.

Arguments against economic growth

1) Environmental concerns: depletion of natural resources and pollution 2) Globalization: undermines the distinctive cultures of many countries, and allows large corporations to exploit workers

What caused the productivity slowdown of 1974-1995?

1) Measurement of productivity problem (harder to measure services than goods, increases in well-being as a result of environment and health and safety measures not included) 2) Deterioration of the U.S. Education System (skills required to do jobs increased, while the preparation workers received in school did not keep pace). All the high-income countries experienced a slowdown in growth during this period suggesting it was a measurement problem.

Benefits of Globalization

Allows a developing country to break out of the vicious cycle of poverty through foreign investment. Gives low income countries access to funds and technology. (1940-1970: low income countries erected high tariff barriers and avoided foreign investment → failed to produce growth; solution: globalization (the process of countries becoming more open to foreign trade and investment)

Why do growth rates matter?

An economy that grows to slowly fails to raise living standards (impoverished, disease-stricken, and missed economic opportunities)

Law of Diminishing Returns

As we add more input, output increases by smaller additional amounts

What explains the economic failure of the Soviet Union?

Centrally planned economy- managers had little incentive to find innovative ways of doing things—only had to meet quotas

Why are small differences in growth rates important?

Compounding: magnifies small differences in interest rates over long periods of time. In the long run, small differences in economic growth rates result in big differences in living standards

Why did the industrial revolution begin in England?

Court systems were independent of King, so the government was credible when it claimed to uphold property rights, protect wealth, and eliminate arbitrary taxes. Without a credible court system, entrepreneurs would have been reluctant to risk their property or their wealth by starting a new business.

Is the United States headed for another productivity slowdown?

Developments in Information Technology: 1) Supporter: Robert Rich → predicts an annual growth rate of 1.8% 2) Detractor: Robert Gordon → predicts an annual growth rate of .5% or less

Economic Growth in the United States

Economic Growth in the United States since 1950: continuing technological change, slowdown 1974-1995.

Is economic growth good or bad?

Economic growth is desirable and governments should undertake policies that will increase growth rates.

When does economic growth occur?

Economic growth occurs when real GDP per capita increases

Growth Policies

Enhancing property rights and the rule of law, improving health and educaiton, promoting technological change, promoting saving and investment.

Economic Growth Model

Explains growth rates in real GDP per capita over the long run

Why don't more low-income countries experience rapid growth?

Failure to enfore rule of law, wars and revolutions, poor public education and health, and low rates of saving and investment

Can China save General Motors?

GM filed for bankruptcy in June 2009, then with $50 billion from the U.S. government reemerged a smaller restructured company. Focused on increasing sales in foreign markets, and Chinese sales soon surpassed U.S. sales. China's shortcomings however, are that they aren't a democracy and fail to fully establish rule of law. This discourages entreprenuers form bringing new ideas.

What Do Parking Tickets in New York City Tell Us About Poverty in the Developing World?

Generally the more corrupt a country, the lower the country's growth rate. As the level of corruption in a country increases, so does the number of parking violations by the country's United Nations delegates (15% of countries that are most corrupt have 10x as many parking violations as the 15% of countries that are least corrupt).

Why haven't most Western European countries, Canada, and Japan, caught up to the United States?

Greater flexibility of US labor markets (high rate of job mobility and lower unemployment rates (opportunity cost)) and greater efficiency of the US financial system (volume and liquidity of financial securities and venture-Capital Firms stimulate start-ups and innovation)

Catch-Up Among the High-Income Countries

High income countries with the lowest incomes in 1960 (Taiwan, Korea, Singapore) grew the fastest, and high income countries with the highest incomes (Switzerland, US) grew the slowest)

2012 GDP's

Highest GDP → Qatar $103,900 Lowest GDP → Democratic Republic of Congo $400

Brain Drain

Highly educated and successful individuals leaving developing countries for high-income countries

What determines how fast companies grow?

Increases in labor productivity: technological change (better machinery and equipment, increases in human capital, better means of organizing and managing production) and quantity of capital available to workers.

Vicious Cycle of Poverty

Low incomes → little savings → few funds available for firms → firms do not invest → economy does not grow → income remains low

New Growth Theory

Model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

Economic Growth from 1,000,000 BC to the Present

No sustained economic growth occurred between 1,000,000 BC and 1300 AD. Sustained economic growth did not occur until the Industrial Revolution (the application of mechanical power to the production of goods, beginning in England around 1750). In the 20th century growth rates increased from 1.3 percent per year to 2.3.

Will China's Standard of Living Ever Exceed That of the United States?

No. Unsuccessful at innovating and producing technological change, exhausted supply of low-wage agricultural workers, low birthrate will cause a decline in labor force and increase in aging population, and autocratic government. Possibly will experience a Soviet future.

What does the economic growth model predict?

Poor countries will grow faster than rich countries

How do government policies support the accumulation of knowledge capital?

Protecting intellectual property with patents and copyrights, subsidizing research and development, and subsidizing education

What is the best measure of a company's standard of living? Why?

Real GDP per capita is the best measure of a country's standard of living because it represents the ability of the average person to buy goods and services

The Per Worker Production Function

Relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant. i. Per-person/per-hour measurements allow us to analyze changes over industry regardless of the amount of people or time spent.

Knowledge Capital

Research and development that contribute to technological change. 1) Firm level → subject to the law of diminishing returns 2) Economy level → subject to increasing returns (non-rival and non-excludable; leads to free riding)

What are the keys to higher living standards?

Rule of law, basic education and health care, increase in the amount of capital per hour worked, adopt the best technology, and participate in the global economy

How does technological change affect the production function?

Shifts up the production function and allows an economy to produce more real GDP per hour worked with the same quantity of capital per hour worked

Are the Developing Countries Catching Up to the High-Income Countries?

Some countries with low levels of real GDP per capita (Niger, Congo) experienced negative economic growth, and other countries with low levels of real GDP per capita (China, Malaysia) experienced rapid growth

What is more important for economic growth: more capital or technological change?

Technological change. Continuous increases in productivity can only be sustained if there is technological change, and in the long run, a company will experience an increasing standard of living only if it experiences continuing technological change.

Patents

The exclusive right to produce a product for a period of 20 years from the date the patent is applied for

Joseph Schumpeter and Creative Destruction

The key to rising living standards is not small changes to existing products but, rather, new products that meet consumer wants in qualitatively better ways. The entrepreneur is central to economic growth.

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

Foreign Portfolio Investment

The purchase by an individual or a firm of stocks or bonds issued in another country

Foriegn Direct Investment

The purchase or building by a corporation of a facility in a foreign country

Is income all that matters?

Those countries with the lowest quality of life are making the fastest progress in improving it—across a range of measures including health, education, and civil and political liberties (declining child mortality, increasing political freedom, and improved medical care). Therefore, changes in attitudes and technology are just as influential as income.