ECON 1202 1st Edition Lecture 14 Outline of Lecture 13 (Economic Growth)I. Why are some countries wealthy and others not?II. Why do growth rates matter?III. U.S. GrowthIV. China Growth V. What determines long-term economic growth?VI. What factors determine labor productivity?Outline of Lecture 14 (Economic Growth (continued))I. First Take: Adam SmithII. Labor ProductivityIII. Smithian GrowthIV. Second Take: Schumpeterian GrowthV. Modern Growth TheoriesVI. Institutional FrameworkVII. InstitutionsVIII. Sustaining Increases in Labor Productivity: The Short Hand FormulationIX. Per Worker Production FunctionX. Investment and the Financial MarketsXI. Investment and SavingEconomic Growth (continued)I. First Take: Adam Smitha. An Inquiry into the Nature and Causes of the Wealth of Nations (1776)i. A country’s wealth is determined by its ability to produce and thus, consumeii. Wealth is determined by:1. Labor productivity2. Productive labor/unproductive laborII. Labor Productivitya. Division of labor and the Industrial Revolutionb. Specializationc. Division of labor is limited by the extent of the marketIII. Smithian Growtha. Market development allows greater specialization/division of laborb. Greater specialization/division of labor increases labor productivityi. Modern terminology-the way in which production is organized and managed impacts labor productivityIV. Second Take: Schumpeterian Growtha. Joseph Schumpeter and the waves of innovation, process of creative destruction, and entrepreneurb. Capitalism, Socialism, and Democracy (1942)i. Capitalism is dynamicii. The Process of Creative Destruction: central element of technological changeiii. The Entrepreneur: central motive force in driving innovation and technological changeiv. New productsv. New technologyvi. New organizationvii. New source of supplyV. Modern Growth Theoriesa. Y=f(L, N, NR, K, HC, E Tech, Institutions)b. New Growth Theories:i. What determined technological change?VI. Institutional Frameworka. Supporting and enforcing private property rights; rule of law and dependable legal systemb. Supporting and extending markets and market organizationc. Political stability and honest governmentsd. Educational institutions e. Stable monetary framework and financial institutionsVII. Institutionsa. Rules of the Gamei. How is self-interest conduct “channeled”?b. What are the incentives created?c. Zero or negative vs. positive sum outcomesd. Institutions create the conditions for economic growthVIII. Sustaining Increases in Labor Productivity: The Short Hand Formulationa. Y=GDP=f(L, K, HC, N, NR, E, Tech, Institutions)b. What drives Y/L (labor productivity) over time?i. Two principal factors:1. Increase in capital per worker2. Technological progress (and human capital)a. Technological process is better and it is the only on subjected to the law of diminishing returnsIX. Per Worker Production Functiona. Short hand graphical framework that connects labor productivity with factors that drive sustained labor productivity growth.b. Note: we are asking the same questions that we did when we asked why the production possibility curves outX. Investment and the Financial Marketsa. Capital Formationb. Human Capital Formationc. Technological Progressi. All of these require investmentXI. Investment and Savinga. Financial Marketsi. Bond/Credit Marketii. Equity (Stock) Marketiii. Primary and Secondary Marketsb. Financial