Macroeconomics-Chapter 9-Long Run Economic Growth

rapid growth

As one might expect, economies with_____________ ___________ tend to be economies that Rapidly add to their physical capital through high savings and investment spending. Upgrade their educational level.Make fast technological progress. (249)

China/India/China/India

Despite dramatic economic growth in _______ over the last three decades and the more recent acceleration of economic growth in ________, __________ has only recently exceeded the standard of living that the United States enjoyed in the early twentieth century, while _________has matched it only recently. And much of the world today is poorer than These two countries. (239)

natural resources/technology/resource scarcity

Differing views about the impact of limited natural resources on long-run economic growth turn on the answers to three questions: How large are the supplies of key _____________ _____________? How effective will _______________ be at finding alternatives to natural resources? Can long-run economic growth continue in the face of _______________ _____________? (260)

physical capital/Physical capital/physical capital

Economists define ________________ _____________ as manufactured resources such as buildings and machines. ______________ ______________ makes workers more productive. For example, a worker operating a backhoe can dig a lot more feet of trench per day than one equipped only with a shovel. The average U.S. private-sector worker today is backed up by more than $350,000 worth of ______________ _____________—far more than a U.S. worker had 100 years ago and far more than the average worker in most other countries has today.

conditional convergence.

Economists still believe that countries with relatively low real GDP per capita tend to have higher rates of growth than countries with relatively high real GDP per capita, other things equal. But other things—education, infrastructure, rule of law, and so on—are often not equal. Statistical studies find that when you adjust for differences in these other factors, poorer countries do tend to have higher growth rates. This result is known as ________________ ___________________. (259)

government intervention

Even when the government isn't corrupt, excessive ________________ ______________ can be a brake on economic growth. If large parts of the economy are supported by wasteful government subsidies, protected from imports, subject to unnecessary monopolization, or otherwise insulated from competition, productivity tends to suffer because of a lack of incentives. (253)

population

For short periods of time, an economy can experience a burst of growth in output per capita by putting a higher percentage of the ________________to work. That happened in the United States during World War II, when millions of women who previously worked only in the home entered the paid workforce. Over the longer run, however, the rate of employment growth is never very different from the rate of population growth. Over the course of the twentieth century, for example, the population of the United States rose at an average rate of 1.3% per year and employment rose 1.5% per year. (243)

labor productivity

For the economy as a whole, ______________ ______________—output per worker—is simply real GDP divided by the number of people working.

Infrastructure/Education/Research and Development/Financial System

Government policies can increase the economy's growth rate through four main channels: Government subsidies to ______________, ______________, _____________, as well as maintaining a well functioning _____________ _____________. (252)

subsidies/environment

Governments can play an important role in promoting—or blocking—all three sources of long-term economic growth: physical capital, human capital, and technological progress. They can either affect growth directly through _______________ to factors that enhance growth, or by creating an ________________ that either fosters or hinders growth. (251)

financial system/financial system/financial system

Governments play an important indirect role in making high rates of private investment spending possible. Both the amount of savings and the ability of an economy to direct savings into productive investment spending depend on the economy's institutions, especially its ___________ _________. A well-regulated and well-functioning _____________ ___________ is very important for economic growth because in most countries it is the principal way in which savings are channeled into investment spending. If a country's citizens trust their banks, they will place their savings in bank deposits, which the banks will then lend to their business customers. But if people distrust their banks, they will hoard gold or foreign currency, keeping their savings in safe deposit boxes or under the mattress, where it cannot be turned into productive investment spending. A well-functioning _______________ _____________ requires appropriate government regulation to assure depositors that their funds are protected from loss. (252)

technological progress

Growth accounting allows us to calculate the effects of greater physical and human capital on economic growth. But how can we estimate the effects of ______________ _____________? We do so by estimating what is left over after the effects of physical and human capital have been taken into account. (246)

real GDP per capita

Historically, rising __________ ________ ____ __________ has translated into rising real income for the great majority of a nation's residents. However, there's no guarantee that this will happen. In fact, if the share of the nation's income going to a particular group of citizens falls over time, that group may be left behind while others benefit from growth. That group may even suffer a decline in their real income while the overall income of the nation is rising. (257)

1.9%

How did the United States manage to produce over eight times as much per person in 2015 than in 1900? A little bit at a time. Long-run economic growth is normally a gradual process in which real GDP per capita grows at most a few percent per year. From 1900 to 2015, real GDP per capita in the United States increased an average of ______% each year. (240)

savings rates/basic education/technological progress

How have the Asian countries achieved such high growth rates? The answer is that all of the sources of productivity growth have been firing on all cylinders. Very high ____________ ________, the percentage of GDP that is saved nationally in any given year, have allowed the countries to significantly increase the amount of physical capital per worker. Very good ___________ ____________has permitted a rapid improvement in human capital. And these countries have experienced substantial __________________ _____________. (255)

5%

In 2014 the United Nations International Panel on Climate Change (IPCC) estimated that global measures limiting the rise in temperatures to 2 degrees centigrade would impose gradually rising costs, reaching about ___% of output by the year 2100. The impact on the world's rate of economic growth would, however, be small—a reduction of approximately 0.06 percentage points each year. The IPCC's numbers were more or less in line with other estimates. Most independent studies have found that environmental protection need not greatly reduce growth. (262)

Paris Agreement

In 2015, in acknowledgement of the seriousness of the problem, 196 countries came together under the ___________ ___________, committing to reduce their emissions of greenhouse gases in an effort to limit the rise in the earth's temperature to no more than 2 degrees centigrade. The linchpin of the agreement was cooperation between China, India, and the United States. China and India agreed to limit their emissions, and the United States, along with other rich countries, committed to develop various forms of public and private financing to help poorer countries pay the cost. (262)

local environmental degradation/global environmental degradation

In analyzing economic growth and its environmental impact, it is useful to distinguish between _____________ _____________ _____________, which affects a geographically limited area, and ___________ _____________ ___________, which is far-reaching, with worldwide impact. As we'll see, it has proven to be far more difficult to address global environmental degradation and, in particular, the problem of climate change. (261)

diminishing returns

In analyzing historical economic growth, economists have discovered a crucial fact about the estimated aggregate production function: it exhibits _______________ ___________ to physical capital. That is, when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity. (244)

education/

In contrast to physical capital, which is mainly created by private investment spending, much of an economy's human capital is the result of government spending on ___________________. (252)

growth accounting

In practice, all the factors contributing to higher productivity rise during the course of economic growth: both physical capital and human capital per worker increase, and technology advances as well. To disentangle the effects of these factors, economists use ___________ ____________, which estimates the contribution of each major factor in the aggregate production function to economic growth.For example, suppose the following are true: The amount of physical capital per worker grows 3% per year. According to estimates of the aggregate production function, each 1% rise in physical capital per worker, holding human capital and technology constant, raises output per worker by one-third of 1%, or 0.33%.(245)

grown

In the United States, and to a lesser extent in other wealthy countries, the share of income going to families near the top of the income distribution, and especially to the 1% of families with the highest incomes, has ___________ substantially since 1980. (257)

identical rates/rose

In the United States, from 1953 through 1980, both real per capita GDP and the real income of the median family grew at nearly ______________ _________ because the distribution of income was quite stable. After 1980, however, the share of national income going to the richest Americans ________ significantly. And while real GDP per capita continued to grow, real median income—the income earned by families in the middle of the income distribution—lagged behind. This means that since 1980 many of those families in the middle have been left behind by economic growth. (257)

Natural resources/natural resources/resource

In the modern world, ________________ _______________ are a much less important determinant of productivity than human or physical capital for the great majority of countries. For example, some nations with very high real GDP per capita, such as Japan, have very few _____________ _____________. Some ____________-rich nations, such as Nigeria (which has sizable oil deposits), are very poor. (247)

human capital/technology/human capital/technology

It's important to realize that diminishing returns to physical capital is an "other things equal" phenomenon: additional amounts of physical capital are less productive when the amount of _____________ ___________ per worker and the _____________ are held fixed. Diminishing returns may disappear if we increase the amount of ____________ ____________ per worker, or improve the _______________, or both at the same time the amount of physical capital per worker is increased. For example, a worker with a $40,000 tractor who has also been trained in the most advanced cultivation techniques may in fact be more than twice as productive as a worker with only a $20,000 tractor and no additional human capital.(245)

Human capital/human capital

It's not enough for a worker to have good equipment—he or she must also know what to do with it. ______________ _____________ refers to the improvement in labor created by the education and knowledge embodied in the workforce. The ____________ ______________ of the United States has increased dramatically over the past century. A century ago, although most Americans were able to read and write, very few had an extensive education. In 1910, only 13.5% of Americans over 25 had graduated from high school and only 3% had four-year college degrees. By 2015, the percentages were 88% and 33%, respectively. (243)

human capital

Just as countries differ substantially in the rate at which they add to their physical capital, there have been large differences in the rate at which countries add to their ______________________ through education.A case in point is the comparison between Argentina and China. In both countries the adult literacy rate has risen steadily over time, but it has risen much faster in China. (250)

rising productivity

Long-run economic growth depends almost entirely on one ingredient: ____________ _____________. (242)

Long-run

Many economists have argued that __________ _________ economic growth—why it happens and how to achieve it—is the single most important issue in macroeconomics because of its direct effect on living standards. (237)

physical capital

One reason for differences in growth rates between countries is that some countries are increasing their stock of _______________ ___________ much more rapidly than others, through high rates of investment spending. In 2015, investment spending was 43% of China's GDP, compared with only 20% in the United States.(250)

higher

Other things equal, countries that are abundant in valuable natural resources, such as highly fertile land or rich mineral deposits, have ____________ real GDP per capita than less fortunate countries. (247)

technological progress/technology/technology/technological progress

Probably the most important driver of productivity growth is _________________ _____________, which is broadly defined as an advance in the technical means of the production of goods and services. We'll see shortly how economists measure the impact of ________________ on growth. Workers today are able to produce more than those in the past, even with the same amount of physical and human capital, because ______________ has advanced over time. It's important to realize that economically important ________________ ________________ need not be flashy or rely on cutting-edge science. (243)

output

Sustained economic growth occurs only when the amount of ___________ produced by the average worker increases steadily. (242)

Research & Development

Technological progress is largely the result of private initiative. But in the more advanced countries, important ___________ ___ ______________ is done by government agencies as well. For example, the internet grew out of a system, the Advanced Research Projects Agency Network (ARPANET), created by the U.S. Defense department, then extended to educational institutions by the National Science Foundation. (252)

upward

Technological progress raises productivity at any given level of physical capital per worker, and therefore shifts the aggregate production function ____________. (247)

2.2%/

The Bureau of Labor Statistics estimates the growth rate of both labor productivity and total factor productivity for nonfarm business in the United States. According to the Bureau's estimates, over the period from 1948 to 2016 American labor productivity rose _______% per year. Less than half of that rise, approximately 49%, is explained by increases in physical and human capital per worker; the rest is explained by rising total factor productivity—that is, by technological progress. (247)

convergence hypothesis

The East Asian experience demonstrates that economic growth can be especially fast in countries that are playing catch-up to other countries with higher GDP per capita. On this basis, many economists have suggested a general principle known as the ________________ _______________. It says that 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. (255)

income/income

The ___________ of the typical family normally grows more or less in proportion to per capita income. For example, a 1% increase in real GDP per capita corresponds, roughly, to a 1% increase in the _________ of the median or typical family—a family at the center of the income distribution. (239)

research and development

The advance of technology is a key force behind economic growth. But science alone is not enough: scientific knowledge must be translated into useful products and processes. And that often requires devoting a lot of resources to _____________ _______ ____________, spending to create new technologies and apply them to practical use. (250)

reduction

The best available estimates show that even a large reduction in greenhouse gas emissions over the next few decades would cause only a modest ________________ in the long-term rise in real GDP per capita. (262)

Per Capita

The key statistic used to track economic growth is real GDP _______ ________—real GDP divided by the population size. (238)

savings/savings/savings/savings

The money for high investment spending comes from ______________. In the next chapter we'll analyze how financial markets channel ____________ into investment spending. For now, however, the key point is that investment spending must be paid for either out of ____________ from domestic households or by ___________ from foreign households—that is, an inflow of foreign capital. (250).

2.6%

The problem of climate change is linked to economic growth: the larger the economy, the more homes, factories, and vehicles, will have to be powered, typically by burning fossil fuels. At present, world energy consumption is overwhelmingly dependent upon fossil fuels, which account for 81.4% of total consumption, while clean, renewable sources account for only ____%. Why? Because historically, fossil fuels have been cheaper to use. (261)

physical capital/human capital/technological progress

There are three main reasons why the average U.S. worker today produces far more than his or her counterpart a century ago. First, the modern worker has far more ______________ ____________ such as machinery and office space, to work with. Second, the modern worker is much better educated and so possesses much more _______________ ____________. Finally, modern firms have the advantage of a century's accumulation of technical advancements reflecting a great deal of ____________________ ________________. (242)

Rule of 70

To have a sense of the relationship between the annual growth rate of real GDP per capita and the long-run change in real GDP per capita, it's helpful to keep in mind the __________________, a mathematical formula that tells us how long it takes real GDP per capita, or any other variable that grows gradually over time, to double. 70 divided by the annual growth rate of variable = Number of years for variable to double. So if real GDP per capita grows at 1% per year, it will take 70 years to double. If it grows at 2% per year, it will take only 35 years to double. In fact, U.S. real GDP per capita rose on average 1.9% per year over the last century. (240)

diminishing returns

To see why the relationship between physical capital per worker and productivity exhibits _________________ ________________, think about how having farm equipment affects the productivity of farmworkers. A little bit of equipment makes a big difference: a worker equipped with a tractor can do much more than a worker without one. And a worker using more expensive equipment will, other things equal, be more productive: a worker with a $40,000 tractor will normally be able to cultivate more farmland in a given amount of time than a worker with a $20,000 tractor because the more expensive machine will be more powerful, perform more tasks, or both. But will a worker with a $40,000 tractor, holding human capital and technology constant, be twice as productive as a worker with a $20,000 tractor? Probably not: there's a huge difference between not having a tractor at all and having even an inexpensive tractor; there's much less difference between having an inexpensive tractor and having a better tractor. And we can be sure that a worker with a $200,000 tractor won't be 10 times as productive: a tractor can be improved only so much. Because the same is true of other kinds of equipment, the aggregate production function shows diminishing returns to physical capital. (244)

one-third/0.33%

Typical estimates suggest that in practice a 1% increase in the quantity of physical capital per worker increases output per worker by only _______ ___________of 1%, or _______%. (245)

level/Rate of Change

When studying economic growth, it's vitally important to understand the difference between a change in _______ and a ______ ____ _________. When we say that real GDP "grew," we mean that the level of real GDP increased. For example, we might say that U.S. real GDP grew during 2015 by $415 billion. If we knew the level of U.S. real GDP in 2014, we could also represent the amount of 2015 growth in terms of a rate of change. For example, if U.S. real GDP in 2014 had been $15,982 billion, then U.S. real GDP in 2015 would have been $15,982 billion + $415 billion = $16,397 billion. We could calculate the rate of change, or the growth rate, of U.S. real GDP during 2015 as: (($16,397 billion - $15,982 billion)/$15,982 billion) × 100 = ($415 billion/$15,982 billion) × 100 = 2.6%. Statements about economic growth over a period of years almost always refer to changes in the growth rate. (240)

GDP

_________ measures the 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. (238)

Economic growth

_____________ ___________, other things equal, tends to increase the adverse impact of human activity on the environment, including an increase in pollution, the loss of wildlife habitats, the extinction of species, and reduced biodiversity. As we saw in this chapter's opening story, China's spectacular economic growth has also brought a spectacular increase in air pollution in its cities. (261)

Property rights/intellectual property rights/property rights/intellectual property rights/intellectual property rights

_____________ ____________ are the rights of owners of valuable items to dispose of those items as they choose. A subset, _____________ ____________ __________, are the rights of an innovator to accrue the rewards of her innovation. The state of ___________ __________generally, and ______________ _____________ ___________ in particular, are important factors in explaining differences in growth rates across economies. Why? Because no one would bother to spend the effort and resources required to innovate if someone else could appropriate that innovation and capture the rewards. So, for innovation to flourish, _____________ __________ _____________must receive protection. (252)

aggregate production function

a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology. GDP per worker = T x (Physical Capital per worker)0.4 x (Human capital per worker)0.6 T represented an estimate level of technology and they assumed that each year of education raises workers human capital by 7%.

technology

advances in _______________ can be exciting and ultimately very useful, but it may take many years of figuring out how to use them before there is a significant impact on living standards. (249)

diminishing rate

as physical capital per worker rises, output per worker also rises—but at a _________________ ___________. (244)

sustainable long-run economic growth

long-run growth that can continue in the face of the limited supply of natural resources and with less negative impact on the environment. (260)

labor productivity

output per worker; also referred to as simply productivity. Increases in labor productivity are the only source of long-run economic growth.

Infrastructure/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. Poor __________________, such as a power grid that frequently fails and cuts off electricity, is a major obstacle to economic growth in many countries. To provide good infrastructure, an economy must not only be able to afford it, but it must also have the political discipline to maintain it. (252)

convergence hypothesis

the _______________ ______________ says that relatively poor countries should have higher rates of growth of real GDP per capita than relatively rich countries. (258)

total factor productivity

the amount of output that can be produced with a given amount of factor inputs.