C h a p t e r ten © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn Quijano.

c h a p t e r c h a p t e r

tenten

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

Prepared by: Fernando & Yvonn Quijano

Long-Run Economic Growth: Sources and Policies

2 of 36© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

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esEconomic Growth Over Time and Around the World

Industrial Revolution The application of mechanical power to the production of goods, beginning in England around 1750.

LEARNING OBJECTIVE1

Economic Growth from 1,000,000 B.C. to the Present


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10 - 1Average Annual Growth Rates for the World Economy

Small Differences in Growth Rates Are Important


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The Benefits of an Earlier Start: Standards of Living in China and Japan

10 - 2

If rapid economic growth continues in China, its standard of living will begin to approach those in the United States and Japan.

CHINA JAPAN

Life expectancy at birth 71.5 years 81.9 years

Infant mortality (per 1,000 live births) 30 3

Percentage of the population surviving on less than $2 per day 47% 0%

Percentage of the population with access to treated water 77% 100%

Percentage of the population with access to improved sanitation 44% 100%


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Why Do Growth Rates Matter?

Growth rates matter because an economy that grows too slowly fails to raise living standards.

“The Rich Get Richer and …”

In the 1980s and 1990s, a small group of countries, mostly East Asian countries such as South Korea, Taiwan, and Singapore, experienced high rates of growth and are sometimes referred to as the newly industrializing countries.


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esWhat Determines How Fast Economies Grow?

LEARNING OBJECTIVE2

Economic growth model A model that explains changes in real GDP per capita in the long run.

Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work.

Economists believe two key factors determine labor productivity: the quantity of capital per hour worked and the level of technology.


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Technological change Change in the ability of a firm to produce a given level of output with a given quantity of inputs

There are three main sources of technological change:

Better machinery and equipment.

Increases in human capital.

Better means of organizing and managing production.


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The Per-Worker Production Function

Per-worker production function The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant.

Human capital The accumulated knowledge and skills that workers acquire from education and training, or from their life experiences.


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The Per-Worker Production Function10 - 3

The Per-Worker Production Function


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Which Is More Important for Economic Growth: More Capital or Technological Change?

Technological Change: The Key to Sustaining Economic Growth

10 - 4Technological Change Increases Output per hour worked


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Endogenous Growth Theory

Endogenous growth theory A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives, and so is determined by the working of the market system.

Patent The exclusive right to a product for a period of 20 years from the date the product was invented.


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Government policy can help increase the accumulation of knowledge capital in three ways:

Protecting intellectual property with patents and copyrights.

Subsidizing research and development.

Subsidizing education.


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esEconomic Growth in the United States

The Productivity Boom: Are We in a “New Economy”?

10 - 6The Contribution of Information Technology to Growth in Real GDP


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The Economic Growth Model’s Predictions of Catch-Up

10-2

LEARNING OBJECTIVE4

COUNTRYREAL GDP PER CAPITA IN 1960 (1996 DOLLARS)

GROWTH IN REAL GDP PER CAPITA, 1960-2000

Botswana $958 5.29%

Thailand 1,091 4.70

Sri Lanka 1,333 2.29

Ecuador 2,003 1.38

Guatemala 2,344 1.29

COUNTRYREAL GDP PER CAPITA IN 1960 (1996 DOLLARS)

GROWTH IN REAL GDP PER CAPITA, 1960-2000

Japan $4,544 4.32%

Norway 8,240 3.00

The Netherlands 9,245 2.45

United Kingdom 9,674 2.10


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esWhy Isn’t the Whole World Rich?

Why Don’t More Low-Income Countries Experience Rapid Growth?

There is no one answer, but most economists point to four key factors:

Failure to enforce the rule of law

Wars and revolutions

Poor public education and health

Low rates of saving and investment


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Why Don’t More Low-Income Countries Experience Rapid Growth?

POOR PUBLIC EDUCATION AND HEALTH

Many low-income countries have weak public school systems, so many workers are unable to read and write.

People who are sick work less and are less productive when they do work.

LOW RATES OF SAVING AND INVESTMENT

The low savings rates in developing countries contribute to a vicious cycle of poverty.


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The Benefits of Globalization

Foreign direct investment The purchase or building by a corporation of a facility in a foreign country.

Foreign portfolio investment The purchase by an individual or firm of stock or bonds issued in another country.

Globalization The process of countries becoming more open to foreign trade and investment.


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es Catch-up

Economic growth model

Endogenous growth theory

Foreign direct investment (FDI)

Foreign portfolio investment

Globalization

Human capitalOrganization CapitalIndustrial RevolutionLabor productivityPatentPer-worker production

functionTechnological change

C h a p t e r ten © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn Quijano.

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