Microeconomics Notes 3 Chapter 9 Global Economic Growth and Development How Do We Define Economic Growth Economic growth Increase in per capita real GDP measured by its rate of change per year Can be shown graphically by shifting the production possibilities curve outward Reflects the fact that more of all goods can be produced within the economy Is economic growth bad Some psychologists contend that growth makes us worse off As with all activities there are costs along with benefits to growth The importance of growth rates Do we need to worry about small differences in the economic growth rate A small difference in the rate of economic growth does not matter very much for next year or the year after BUT it makes considerable difference for the more distant future due to the power of compounding The Rule of 70 A rule stating that the appropriate number of years required for per capital real GDP to double is equal to 70 divided by the average rate of economic growth Example At an annual growth rate of 10 per capita real GDP should double in about 70 10 7 years Productivity Increases The Heart of Economic Growth Rate of Growth of Capital Rate of Growth of Labor Rate of Grwoth the Productivity of Capital Labor Economic Growth Labor Productivity Total real domestic output real GDP divided by the number of workers output per worker or the number of labor hours Labor Productivity real GDP output per worker It increases whenever average output produced per worker or per hour worked increases during a specific time period Saving A Fundamental Determinant of Economic Growth Saving as a determinant of growth To have more consumption in the future you have to consume less today and save the difference between your income and your consumption New Growth Theory and the Determinants of Growth New Growth Theory A theory of economic growth that examines the factors determining why technology research innovation and the like are undertaken and how they interact 1 Technology a separate factor of production a When the rewards are greater the more technological advances will occur 2 Research and development R D a Patents A government protection that gives an inventor the exclusive right to make use or sell an invention for a limited period of time currently 20 years b Positive externalities and R D i Rippling effect on other ii For every 1 rise in the stock of R D in the United States alone productivity 3 Innovation worldwide increases by about 0 25 Transforming an invention into something that is useful to humans a New growth theorists believe that real wealth creation comes from innovation and invention is a component of innovation The open economy and economic growth Free trade encourages the spread of technology The importance of ideas and knowledge Knowledge ideas and productivity are related ideas are what drive economic growth Economist Paul Romer and other new growth theorists conclude that Economic growth can continue as long as we keep coming up with new ideas The importance of human capital Knowledge ideas and productivity are all tied together Human capital consists of knowledge people acquire Investing in human capital raises living standards Immigration Property Rights and Growth Population and immigration as they affect economic growth MIT economist Michael Kremer believes population growth drives technological progress Question Does immigration spur economic growth Yes lol Question How can well defined property rights stimulate economic growth The more certain property rights are The more people can show that they own things The more capital accumulation there will be The more entrepreneurship there will be Economic Development Development Economics The study of factors that contribute to the economic growth of a country Goal help the 4 billion people with low living standards to join the 2 billion people with moderately high ones Putting world poverty into perspective At least one half of the world s population lives at subsistence level 20 of the world lives on less than 1 50 per day The U S poverty level exceeds the average income of one half the world Relationship between population growth and economic development There are nearly 6 5 billion people on earth By 2050 according to the U N world population will be close to 9 1 billion Growth will occur mainly in developing nations Relationship between population growth and economic development In An Essay on the Principle of Population 1978 Thomas Robert Malthus predicted that world population growth would eventually outstrip food supplies He was proved wrong as the supply of food has been expanding faster than the increase in demand caused by increased population The more economic development occurs the slower the population growth rate Growth leads to smaller families Birth rates decline with modernization Reduced infant mortality People do not rely on children to take care of them in old age The stages of development Agricultural stage Manufacturing stage Services stage Keys to economic development Establishing a system of property rights Developing an educated population Letting creative destruction run its course Limiting protectionism Chapter 10 Real GDP and the Price Level in the Long Run Output Growth and the Long Run Aggregate Supply Curve Aggregate Supply The total of all planned production for the economy Long Run Aggregate Supply Curve LRAS A vertical line representing the real output of goods and services after full adjustment has occurred It represents the real GDP of the economy under conditions of full employment the economy is on its production possibilities curve LRAS is vertical Input prices fully adjust to changes in output prices Suppliers have no incentive to increase output Unemployment is at the natural rate Determined by endowments and technology or existing resources Base year dollars The value of a current sum expressed in terms of prices in a base year Endowments The various resources in an economy including both physical resources and such resources as ingenuity and management skills Growth is shown by outward shifts of either the production possibilities curve or the LRAS curve caused by Growth of population and the labor force participation rate Capital accumulation Improvements in technology Total Expenditures and Aggregate Demand Aggregate Demand The total of all planned expenditures in the entire economy Questions What determines the total amount that individuals governments firms and foreigners