P1252109248IXtrO - PowerPoint PPT Presentation

Title: P1252109248IXtrO


1
CHAPTER 11 Economic Growth
2
A Hundred Years of Economic Growth in the United
States
3
Economic Growth Around the World Catch-Up or Not?
4
Economic Growth Around the World Catch-Up or Not?
5
Catch-Up Asia
6
Economic Growth - deals with how quickly the
production possibilities curve shifts to
the right.PPP data -- purchasing power adjusted
1.33
0.75
1.27
0.79
2.44
0.41
14.29
0.07
11.11
0.09
1.43
0.70
7
Economic Growth (cont.)
1051
0.5
1.0
1105
1218
2.0
3.0
1344
1480
4.0
1629
5.0
2594
10.0
6192
20.0
8
Economic Growth (cont.)

• The data show the importance of the growth rate
  of per capita income -- the power of compound
  interest.
• Perhaps the most important question in economics
  is what determines the growth rate of per capita
  income.
• In other words, why do countries grow faster or
  slower?

9
The Causes of Economic Growth

• Preconditions for economic growth
• Markets enable people to specialize and trade and
  to save and invest.
• Property Rights are the social arrangements that
  govern the ownership, use and disposal of
  resources, goods, and services.
• Money facilitates transactions, and thus
  specialization and exchange.
• The Rule of Law reduces uncertainty and risk,
  and allows investment and complex contracts.

10
The Causes of Economic Growth (cont.)

• Incentives must exist to encourage those
  activities that generate growth.
• Savings and investment in physical and human
  capital
• discovery of new technology

• The production function - is a relationship
  that shows how real GDP changes as inputs
  change.

Y A F ( K , N )
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The Causes of Economic Growth (cont.)

• The production function in per capita terms shows
  the relationship between real GDP per capita and
  the amount of capital per capita given the level
  of technology. Per capita is Latin for per
  head, i.e. per person.

12
Diagrammatic Representation of the Production
Function
Outputperhead
A1F
(Y
/N)2
(Y
/N)1
( )2
( )1
0
K
K
Capital per head
N
N
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Is the key to increasing output per head
increasing the capital stock?

• The law of diminishing returns is that as the
  quantity of one input increases, with the
  quantities of all other inputs remaining the
  same, output increases, but eventually by ever
  smaller increments. If this was not so, we
  could grow the worlds wheat supply in a
  flowerpot.
• This implies that increasing the capital stock by
  increasing investment is not the only or perhaps
  even the best way to faster growth of output per
  head.

14
Dangers of Capital Fundamentalism

• The production function shows the potential
  output, if all inputs are used as well as they
  could be.
• Bad investments -- white elephants -- or bad
  organization/system/integration may mean actual
  output is much less than apparent potential
  output. Think of Russia, Sudan, Haiti, etc.

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The production function and technology
change

• An advance in technology, A,

Y A F ( K , N )
- - shifts the production function upward.
16
Diagrammatic Representation of the Production
Function
Outputperhead
A1F
(Y
/N)2
(Y
/N)1
( )2
( )1
0
K
K
Capital per head
N
N
17
The production function and technology
changes

• An advance in technology, A,

Y A F ( K , N )
- - shifts the production function upward.

• The same amount of capital per head now generates
  more output per head.

• Technological improvements are one key to
  economic growth.

18
Malthusian Theory of Growth Classical Growth
Theory

• The view that real GDP growth is temporary and
  that when real GDP per person rises above the
  subsistence level, a population increase
  eventually brings real GDP per person back down
  to the subsistence level.
• The subsistence real wage is the minimum real
  wage rate needed to maintain life, given local
  conditions and expectations.

19
Malthusian Theory of Growth

• Consider a subsistence economy.

Outputperhead
A0F
0
Capital per head
20
Growth Begins
LS0
5
New technologies and more capital increase the
productivity of labor
4
Real wage rate (1776 shillings per day)
3
2
1
LD0
0
1
2
3
4
5
6
Labor (millions)
21
Malthusian Theory of Growth

• We can see that the tech shock results
  in an output level above subsistence
  level.

Outputperhead
A1F
A0F

• What will happen now?

0
Capital per head
22
Malthusian Theory of Growth

• What will happen now?

Outputperhead
A1F
A0F
(Y
2/N1)

• The gain in output per head was only
  temporary.

0
Capital per head
23
A Dismal Outcome
LS0
5
When the real wage rate exceeds the subsistence
level, the population increases
4
3
Real wage rate (1776 shillings per day)
2
LD1
1
0
1
2
3
4
5
6
Labor (millions)
24
Neoclassical Theory of Growth

• For developed high income economies, increases
  in income per person seem to result in a decrease
  in the population growth rate parents prefer
  better quality children rather than more
  children?.
• Neoclassical growth theory suggests that real GDP
  per person grows because technological change
  induces savings and investment.

25
Neoclassical Growth Begins
10
SS0
8
Real interest rate (percent per year)
6
4
2
ID0
0
0.5
1.0
1.5
2.0
2.5
Savings and investment (trillions of 1992 dollars)
26
Neoclassical Theory of Growth

• Consider a developed economy.

Outputperhead
A0F
0
Capital per head
27
Neoclassical Theory of Growth
Outputperhead
A1F
A0F
0
Capital per head
28
Neoclassical Theory of Growth

• Without further tech change, the law
  of diminishing marginal returns will
  halt the process.

Outputperhead
A1F
A0F
(Y
2/N1)
0
Capital per head
29
Neoclassical Growth Ends
KS0
10
When the real interest rate exceeds the target
rate, saving and investment increase the supply
of capital.
8
Real interest rate (percent per year)
6
a
LKS
4
2
KD0
0
5
10
15
20
25
Capital stock (trillions of 1992 dollars)
30
Growth Theory

• New growth theory begins with two stylized
  facts about market economies
• 1) Discoveries result, at least in part, from
  choices.
• 2) Discoveries bring profit, and competition
  destroys profit in excess of the normal real rate
  of return on capital.

31
New Growth Theory

• Discoveries and Choices
• The pace of discoveries is not wholly determined
  by chance.
• It also depends on how many people are looking
  for a new technology and how intensively they are
  looking. In the modern world, firms invest in
  research and development (RD).
• Because competition erodes the advantage of new
  knowledge, firms have incentives to keep looking
  for yet newer discoveries.
• People also choose how much investment to make in
  human capital e.g. how much education to get.

32
New Growth Theory

• Discoveries Used by All
• Once a profitable new discovery has been made,
  everyone can use it at least eventually. But
  for a while, it is super-profitable for the
  discoverer.
• Knowledge can have strong externalities -- enough
  new knowledge, technical change, may mean
  diminishing returns to more capital never happen.
  So more capital, more investment, may mean
  growth for ever, so long as knowledge continues
  to grow.

33
New Growth Theory
KS0
10
8
Real interest rate (percent per year)
6
LKS
4
a
KD0
2
0
1
2
3
4
5
Capital (trillions of 1992 dollars)
34
Factors in achieving faster growth

• Ensure the preconditions
• Stimulate saving (e.g. by tax policy)
• Stimulate research and development.
• Encourage efficiency and competition, e.g. by
  open international trade
• Improve the quality, quantity, and efficiency of
  education

35
Benefits and Costs of Economic Growth

• Benefits
• Expanded production possibilities
• health care, medical research, etc.
• space exploration, science, etc.
• environmental improvements (if resources are
  devoted to solving environmental problems)
• in general, MORE CHOICE, more goodies, more
  consumption/person

36
Benefits and Costs of Economic Growth

• Costs 1) Foregone consumption
• 2) Depletion of natural resources
• 3) Increased pollution
• 4) More frequent job and location changes
• 5) Changed culture and society