Chapter 9: Long-Run Economic Growth

Economist Robert Gordon argues that new information technologies won't create as much growth as the five big innovations:

Electricity The internal combustion engine Running water and central heating Modern chemistry Mass communication, movies, and telephones

technological progress

advance in the technical means of the production of goods and services; most important driver of productivity growth

example

company cars company computers

is not an input

contribution to SSI bonds issue by an automaker profit of a large investment company decrease property taxes

physical capital

human-made resources (buildings, machines); increases productivity

aggregate production functions shifts up when

it is possible to produce more output for a given amount of physical capital per worker

Any large, sustainable increase in real GDP must be due to steadily increasing __________.

labor productivity

Label the following statements as True or False.

1. All else equal, countries with more natural resources have a higher GDP per capita than those with few natural resources. true 2. Over the past two hundred years, improvements in productivity have offset lost productivity reduction due to less land being available. true 3. The key to prosperity in the 20th century is an economy rich in natural resources. false 4. Human and physical capital are only beneficial to an economy when there is an abundance of natural resources in the economy. false

why real GDP per capita?

isolates the effects of changes in the population; increase in population lowers average standard of living unless matched by increase in real GDP

example

adult literacy increase the number of college graduates increase a doctors knowledge about a new cancer treatment more people graduate from culinary school

government impacts on long-term economic growth

affect growth directly through subsidies to factors that enhance growth; create environment that hinders or fosters growth; protection of property rights; political stability and good governance

is an input

amount of oil discover in texas unskilled workers from latin America recent graduate with an engineering degree upgrade computers for mikey's motor

example of negative excessive government intervention

Latin America, Argentina's slow progress interrupted by repeated setbacks

Identify whether the statements below are true or false

Long run economic growth is unlikely to be sustainable because of finite natural resources. false In the modern economy, countries that possess few domestic natural resources essentially have no chance to develop economically. false Finding alternatives to natural resources will be very important to long-term economic growth. true In the modern economy, human and physical capital are generally less important in productivity than natural resources. false In the 19th century, countries with the highest per capital GDP were nearly always abundant in minerals and productive farming land. true

Which of the following best describes the idea of economic convergence?

Lower GDP per capita countries will catch up with higher GDP per capita countries.

Identify whether the following statements about climate change and economic growth are true or false by dragging and dropping the relevant word into the bins provided.

Poorer countries have historically been responsible for the bulk of world carbon emissions because of poor technology and environmental regulations. False Poorer countries have historically been responsible for the bulk of world carbon emissions because of poor technology and environmental regulations. True Tackling climate change issues is likely to only modestly dent long-term economic growth. True Carbon emissions are negatively correlated with economic growth. False

WHY GROWTH RATES DIFFER

Savings and investment spending Education Research and development

GDP per worker equation

T x (physical capital per worker)^0.4 x (human capital per worker)^0.6; Brookings Institution assumed each year of education increased workers' human capital by 7%

___________________ , which is/are a key contributor to economic growth, generally requires significant investment in __________________.

Technological progress ; research and development

total factor productivity

amount of output that can be produced with a given amount of factor inputs (physical capital, human capital, labor); increases are central to economic growth

importance of trust in financial system

assure depositors of protection from loss so trust banks and place savings in banks instead of hoarding where it can't become productive investment spending

negative externality

cost that individuals or firms impose on others without having to offer compensation; pollution; no incentive to avoid without government intervention

convergence hypothesis

differences in real GDP per capita among countries tend to narrow over time because countries that start with lower real GDP per capita tend to have higher growth rates; negative relationship between real GDP per capita annual growth rate and real GDP per capita

The purpose of growth accounting is to:

estimate the contribution each component of the aggregate production function makes to overall economic growth.

growth accounting

estimates contribution of each major factor in the aggregate production function to economic growth; suggests education and its effect on productivity is even more important than increases in physical capital

Bureau of Labor Statistics

estimates the growth rate of both labor productivity and total factor productivity for nonfarm business in US

effect of growth rates

even small differences in growth rates have large consequences over the long-run

long-run vs. short-run labor productivity

for short periods of time, economy can have a burst of growth in output per capita by putting higher percentage to work (women during WWII); in long-run, rate of employment growth close to rate of population growth

patent

government-created temporary monopoly given to innovator for use or sale of innovation; incentive to invent, encourages competition

typical course of long-run growth

gradual process in which real GDP per capita grows a few percent a year; US average 1.9% a year

Countries\' real GDP per capita growth rates differ largely due to disparities in the rates at which they accumulate ________________________, as well as the rate of _______________ change.

human and physical capital / technological

human capital

improvement in labor created by the education and knowledge embodied in the workforce

reasons for difference in national growth rates

increasing stock of physical capital more rapidly through higher rates of investment spending; add different amounts to stock of physical capital because of different rates of savings and investment spending; rate of growth in education level; R & D

government subsidies

infrastructure to provide a foundation for economic activity; basic public health measures; education; research; R&D; well-regulated and well-functioning financial system

China grew faster than India because

its higher levels of investment spending raised its level of physical capital per worker faster, faster technological progress

excessive government intervention can impede economic growth when

large parts of economy supported by government subsidies, protected form imports, subject to unnecessary monopolization cause lack of incentives and competition

sustainable long-run economic growth

long-run growth that can continue in the face of the limited supply of natural resources and impact of growth on the environment

important constraints on future growth

low education levels, inadequate infrastructure (India)

maintaining a well-functioning financial system

making high rates of investment possible; amount of savings and ability of economy to direct savings into productive investment spending depends on it

Rule of 70

mathematical formula that tells how long it takes real GDP per capita, or any other variable that grows gradually over time, to double; 70/annual growth rate of variable; can only be applied to positive growth rate

why GDP?

measures total value of an economy's production of final goods and services as well as the income earned in that economy in a given year

three main reasons average US worker produces far more than before

more physical capital, more human capital, technological progress

Japan since WWII

most dramatic example of long-run economic growth; sustained increase in output per capita

example

new distribution techniques a new cancer treatment

income of typical family related to per capita income

normally grows more or less in proportion; 1% increase in real GDP per capita = 1% increase in income of median family; percentage of future real GDP per capita equals percentage purchasing power compared to future family

conditional convergence

other things not equal, poorer countries still tend to have higher growth rates

investment spending must be paid for either

out of savings from domestic households or by savings from foreign households (inflow of foreign capital) through financial markets

labor productivity

output per worker or per hour; real GDP divided by the number of people working

savings rate

percentage of GDP saved nationally in a year

diminishing returns to physical capital imply a relationship between

physical capital per worker and output per worker

Infrastructure

physical capital, such as roads, power lines, ports, information networks, and other parts of an economy, that provides the underpinnings, or foundation, for economic activity

When considering economic growth, many policy makers focus on real GDP per capita since it takes into account the potentially distorting effects of

population change

overall connection between real GDP per capita and population growth

real GDP can grow because of population growth but any large increase in real GDP per capita must be the result of increased output per worker

convergence among wealthy countries

real GDP per capita in Western Europe, North America, and some of Asia more similar but gap between them and rest of world growing

key statistic to track economic growth

real GDP per capita; real GDP divided by population size

intellectual property rights

rights of innovator to accrue rewards of innovation; necessary to encourage innovation

property rights

rights of owners of valuable items to dispose of them as they choose

long-run economic growth depends almost entirely on

rising productivity

In many countries growth has been achieved through high rates of __________ and ______________ spending.

saving and investment

why real GDP?

separates changes in the quantity of goods and services from the effects of a rising price level

using growth in real GDP per capita

should not be a policy goal in and of itself but useful summary measure of a country's economic progress over time

aggregate production function

shows how productivity depends on the quantities of physical capital per worker and human capital per worker and state of technology; these factors increase over time and function disentangles effects of them on overall productivity

Research and development (R&D):

spending to create and implement new technologies Thomas Edison: inventor of light bulb.... And research and development.

sustained economic growth occurs only when

the amount of output produced by the average worker increases steadily

how to estimate effects of technological progress

what is left over after the effects of physical and human capital

diminishing returns to physical capital

when human capital per worker and state of technology are fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity in the aggregate production function