Carlos Andres Rodriguez Herrera 1 31 23 Principles of Macroeconomics ECON 2002 01 Chapter 9 Global Economic Growth and Development Introduction From the late 1990s throughout most of the 200s media reports bemoaned the low U S saving rate U S residents were saving only a little over 2 percent of their annual personal disposable income Since 2009 the average private saving rate has more than doubled However the overall saving rate which includes government saving has decreased In this chapter you will learn how the rate of saving affects a nation s long term economic performance Learning Objectives Explain why productivity increases are crucial for maintaining economic growth Define economic growth Recognize the importance of economic growth rates Describe the fundamental determinants of economic growth Understand the basis of new growth theory Discuss the fundamental factors that contribute to a nation s economic development Chapter Outline Productivity Increases The Heart of Economic Growth Saving A Fundamental Determinant of Economic Growth How Do We Define Economic Growth New Growth Theory and the Determinants of Growth Immigration Property Rights and Growth Economic 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 Economics growth occurs when there are increases in per capita real GDP measured by the rate of changed in per capita real GDP per year Observation Is economic growth bad India has a real GDP more than 15 times as large as that of Denmark but India s population is about 200 times greater than that of Denmark India is relatively poor and Denmark is relatively rich Some psychologists contend that growth makes us worse off given that the richer we are the greater our needs As with all activities there are costs along with benefits to growth The Ohio State University 1 The importance of growth rates The Rule of 70 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 When we talk about growth rates we are talking about compounding 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 How quickly the level of a nation s per capita real GDP increases depends on the rate of economic growth Example At an annual growth rate of 10 per capita real GDP should double in about 70 10 7 Years The rule of 70 implies that at lower rates of economic growth much more time must pass before per capita real GDP will double The rule of 70 verifies that even very slight differences in economic growth rates are important Benefits Reduction in illiteracy Reduction in poverty Improved health Longer lives Political stability Costs Environmental pollution Breakdown of the family Isolation and alienation Urban congestion Productivity Increases The Heart of Economic Growth Economic Growth Rate of growth of capital Rate of growth of labor Rate of growth in the productivity of capital and of labor 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 is normally measured by dividing total real domestic output real GDP by the number of workers or the number of labor hours It increases whenever average output produced per worker or per hour worked during a specific time period increases Total capital is the sum of physical capital such as tools and machines and human capital which is the amount of knowledge acquired from research and education 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 If there is no investment there would be much less economic growth New Growth Theory and the Determinants of Growth New Growth Theory The per capita growth rates of capital and labor plus the per capita growth rate of their productivity constitute the rate of economic growth A theory of economic growth that examines the factors determining why technology research innovation and the like are undertaken and how they interact Carlos Andres Rodriguez Herrera 1 31 23 Technology a separate factor of production When the rewards are greater the more technological advances will occur Research and Development R D How much spending a nation devotes to R D can have an impact on its long term economic growth Patents a A government protection that gives an inventor the exclusive rights to make use or sell an invention for a limited period of time currently 20 years Positive externalities and R D a Positive externalities are benefits from an activity that are enjoyed by someone besides the instigator of the activity b For every 1 rise in the stock of R D in the United States alone productivity worldwide increases by about 0 25 c Countries that import high tech goods are able to imitate the technology The open economy and economic growth Free trade encourages the spread of technology and industrial ideas Open economies may experience higher rates of economic growth because their own industries have access to a bigger market Innovation Transforming an invention into something that is useful to humans or benefits the economy New growth theorists believe that real wealth creation comes from innovation and invention is a facet of innovation The importance of ideas and knowledge Production and manufacturing knowledge is just as important as the other determinants and perhaps even more so Knowledge is a factor of production that like capital has to be paid for by forgoing current consumption economies must therefore invest in knowledge just as they invest in machines 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 Increases in the productivity of the labor