Slide 1Slide 2Comparing Economies Across Time and SpaceSlide 4Income Around the World, 2010PitfallsPitfallsGrowth RatesGrowth RatesCross-Country Comparison of Growth RatesECONOMICS IN ACTIONECONOMICS IN ACTIONECONOMICS IN ACTIONECONOMICS IN ACTIONThe Sources of Long-Run GrowthAccounting for Growth: The Aggregate Production FunctionAccounting for Growth: The Aggregate Production FunctionAccounting for Growth: The Aggregate Production FunctionDiminishing Returns to Physical CapitalDiminishing Returns to Physical CapitalPhysical Capital and ProductivityPitfallsPitfallsGrowth AccountingTechnological Progress and Productivity GrowthWhat About Natural Resources?ECONOMICS IN ACTIONECONOMICS IN ACTIONECONOMICS IN ACTIONWhy Growth Rates DifferWhy Growth Rates DifferHuman Capital and Catch-UpFOR INQUIRING MINDSFOR INQUIRING MINDSTechnology, Markets, and the “New Growth Theory”Technology, Markets, and the “New Growth Theory”Technology, Markets, and the “New Growth Theory”GLOBAL COMPARISON: Old Europe and New TechnologyGLOBAL COMPARISON: Old Europe and New TechnologyGLOBAL COMPARISON: Old Europe and New TechnologyThe Role of Government in Promoting Economic GrowthECONOMICS IN ACTIONECONOMICS IN ACTIONSuccess, Disappointment, and FailureSuccess, Disappointment, and FailureSuccess, Disappointment, and FailureSlide 48Success, Disappointment, and FailureIs World Growth Sustainable?The Real Price of Oil, 1949-2010U.S. Oil Consumption and Growth over TimeEconomic Growth and the EnvironmentClimate Change and GrowthEconomic Growth and the EnvironmentECONOMICS IN ACTIONECONOMICS IN ACTIONVIDEOSummarySummarySummarySummarySummarySummarySummarySummarySummaryKey TermLong-Run Economic GrowthChapter 9(24)THIRD EDITIONECONOMICSandMACROECONOMICSPaul Krugman | Robin Wells•How long-run growth can be measured by the increase in real GDP per capita, how this measure has changed over time, and how it varies across countries•Why productivity is the key to long-run growth, and how productivity is driven by physical capital, human capital, and technological progress•The factors that explain why growth rates differ so much among countries•How growth has varied among several important regions of the world and why the convergence hypothesis applies to economically advanced countries•The question of sustainability and the challenges to growth posed by scarcity of natural resources and environmental degradationWHAT YOUWILL LEARNIN THIS CHAPTERComparing Economies Across Time and SpaceReal GDP per CapitaIncome Around the World, 2010PitfallsChange in Levels versus Rate of Change•When studying economic growth, it’s vitally important to understand the difference between a change in level and a rate of change. •When we say that real GDP “grew,” we mean that the level of real GDP increased.PitfallsChange in Levels versus Rate of Change•We might say that U.S. real GDP grew during 2010 by $385 billion. If U.S. real GDP in 2009 was $12,703 billion, then U.S. real GDP in 2010 was $12,703 billion + $385 billion = $13,088 billion. •We could calculate the rate of change, or the growth rate, of U.S. real GDP during 2010 as: [($13,088 billion − $12,703 billion)/$12,703 billion] × 100 = ($385 billion/$12,703 billion) × 100 = 3.03%.Growth Rates•How did the United States manage to produce more than seven times more per person in 2010 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 2010, real GDP per capita in the United States increased an average of 1.9% each year.Growth RatesThe Rule of 70 tells us how long it takes real GDP per capita, or any other variable that grows gradually over time, to double.Cross-Country Comparison of Growth RatesECONOMICS IN ACTIONIndia Takes Of•India achieved independence from Great Britain in 1947, becoming the world’s most populous democracy—a status it has maintained to this day. •Despite ambitious economic development plans, India’s performance was consistently sluggish. In 1980, India’s real GDP per capita was only about 50% higher than it had been in 1947. Real GDP per capita has grown at an average rate of 4.2% a year, tripling between 1980 and 2010.ECONOMICS IN ACTIONIndia Takes Of•What went right in India after 1980? •Many economists point to policy reforms. For decades after independence, India had a tightly controlled, highly regulated economy. Today, a series of reforms opened the economy to international trade and freed up domestic competition.ECONOMICS IN ACTIONThe Luck of the Irish•In the nineteenth century, Ireland was desperately poor.•Even as late as the 1970s, Ireland remained one of the poorest countries in Western Europe, poorer than Latin American countries such as Argentina and Venezuela.ECONOMICS IN ACTIONThe Luck of the Irish•But for the last few decades real GDP per capita has grown almost as fast in Ireland as in China, and all that growth has made Ireland richer than most of Europe. Irish real GDP per capita is now higher than in the United Kingdom, France, and Germany. •Why has Ireland, after centuries of poverty, done so well? •A very good infrastructure and human capital.The Sources of Long-Run Growth•Labor productivity, often referred to simply as productivity, is output per worker.•Physical capital consists of human-made resources such as buildings and machines.•Human capital is the improvement in labor created by the education and knowledge embodied in the workforce.•Technology is the technical means for the production of goods and services.Accounting for Growth: The Aggregate Production FunctionThe aggregate production function is 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.Accounting for Growth: The Aggregate Production Function•A recent example of an aggregate production function applied to real data comes from a comparative study of Chinese and Indian economic growth by the economists Barry Bosworth and Susan Collins of the Brookings Institution. •They used the following aggregate production function:Accounting for Growth: The Aggregate Production FunctionUsing this function, they tried to explain why China grew faster than India between 1978 and 2004. About half the difference was due to