I. Learning Objectives II. Economic Growth

Transcription

1 I. Learning Objectives In this chapter students will learn: A. Two ways that economic growth is measured. B. The definition of modern economic growth and the institutional structures needed for an economy to experience it. C. The general supply, demand, and efficiency forces that give rise to economic growth. D. About growth accounting and the specific factors accounting for economic growth in the United States. E. Why the trend rate of U.S. productivity growth has increased since the earlier period. F. Differing perspectives as to whether growth is desirable and sustainable. II. Economic Growth A. Economic growth can be defined two ways. 1. An increase in real GDP over time 2. An increase in real GDP per capita over time a. Per capita GDP real GDP divided by the population is the superior definition to compare living standards. For example, China s 2008 GDP was $4326 billion compared to Denmark s $343 billion, but per capita GDPs were $3267 and $62,118, respectively. b. Growth in real GDP does not guarantee growth in real GDP per capita. If the growth in population exceeds the growth in real GDP, real GDP per capita will fall. B. Growth is an important economic goal because it means more material abundance and ability to meet the economizing problem. Growth lessens the burden of scarcity. C. The arithmetic of growth is impressive. The rule of 70 calculates how long it takes a nation s GDP to double: 70 / rate of growth. Using the rule of 70, an economy would require 35 years to double if the annual growth rate is 2 percent; an annual growth rate of 4 percent would allow the GDP to double in only 18 years. D. Growth in the United States 1. Real GDP increased sixfold between 1950 and 2009, and real per capita GDP rose more than threefold (Table 25.1). 2. Real GDP grew at a rate of 3.2 percent per year between 1950 and 2009, while real GDP per capita grew about 2 percent per year during the same period. But these raw numbers must be qualified. a. Growth doesn t measure improvements in the quality of products. b. Growth doesn t measure increased leisure time.

2 c. Growth doesn t take into account effects on the environment or quality of life. 3. Growth rates are not constant or smooth over time, and the historically recent occurrence of sustained growth is not shared equally by all countries. III. Modern Economic Growth A. Modern economic growth is characterized by sustained, ongoing increases in living standards that can cause dramatic increases in the standard of living within a single lifetime. B. Economic historians informally date the start of the industrial revolution to 1776, when Scottish inventor James Watt perfected a powerful and efficient steam engine. This engine could drive industrial factory equipment, steam ships, and steam locomotives. C. Industrial factories could mass-produce goods. Resources could flow to factories, and final goods could be shipped to distant consumers at low cost. Major population shifts occurred as people left farms to work in urban industries. D. In earlier times, material standards of living changed very little over hundreds of years. Modern economic growth has caused dramatic changes in culture, society, and politics. 1. Vast increases in wealth and living standards have allowed ordinary people to have significant time for leisure activities and the arts. 2. Social changes have included an end of feudalism, the institution of universal public education, and acceptance of women and minorities into the workforce and positions of power. 3. Politically, countries with modern economic growth have tended toward democracy, a form of government that was extremely rare before the industrial revolution. E. The Uneven Distribution of Growth 1. Modern economic growth has spread only slowly from its British birthplace. It advanced to Western Europe in the early 1800s, the United States, Canada, and Australia in the mid- 1800s, Asia, Central and South America, and the Middle East in the early 1900s, and Africa in the past few decades. 2. The different starting dates for modern economic growth in various parts of the world are the main cause of the vast differences in per capita GDP levels seen today (Figure 25.1). F. Catching Up is Possible 1. Countries that began modern economic growth more recently are not doomed to be permanently poorer than the countries that began modern economic growth earlier. 2. The poorer follower countries can grow much faster because they can simply adopt existing technologies from rich leader countries. 3. The growth rates of leader countries are constrained by the rate of technological progress, while follower countries have been able to catch up by adopting more advanced technologies and growing rapidly (Table 25.2).

3 4. The United States GDP is much higher than other leader countries primarily because a larger fraction of citizens are employed and employees work more hours per week than in many other countries. 5. Consider This Economic Growth Rates Matter even small differences in growth rates are compounded over time to cause large differences in GDP. IV. Institutional Structures That Promote Growth A. Strong property rights people will not invest if they believe thieves or government will steal their investments or expected returns. B. Patents and copyrights giving inventors and authors the exclusive right to market and sell their work creates a strong financial incentive to invent and create. C. Efficient financial institutions needed to channel household savings toward the businesses, entrepreneurs, and investors who do most of the country s investing and inventing. D. Literacy and widespread education highly educated inventors develop new technologies, and a highly educated workforce implements the new technologies for productive use. E. Free trade countries can specialize so that different kinds of output can be produced in the countries where they can be made most efficiently, and new ideas and innovations can be quickly spread to other countries. F. A competitive market system firms have considerable autonomy to follow market signals in deciding on current production and investment to produce what consumers will demand. G. Other difficult-to-measure factors influence a nation s capacity for growth, including political stability, positive cultural beliefs about material progress, and positive attitudes about work and risk taking. H. Consider This Patents and Innovation 1. Patents protect pharmaceutical companies for the invention of medicines, giving them 20- year monopolies to recover their research and development costs. 2. Some follower countries, like India, allow their firms to copy and market drugs that are still under patent protection in the United States. 3. The copying of drugs allows Indian consumers to get more drugs at lower prices, but the lack of patent protection discourages firms from innovating new drugs. V. Determinants of Growth A. Four supply factors relate to the physical ability of the economy to expand. 1. Increases in the quantity and quality of natural resources 2. Increases in the quantity and quality of human resources 3. Increases in the supply (or stock) of capital goods 4. Improvements in technology B. Two demand and efficiency factors also determine growth. 1. Households, businesses, and government must increase their demand for the nation s growing output of goods and services. 2. Full employment of resources and productive and allocative efficiency are necessary to get the maximum amount of production at the lowest cost, with the mix of goods society wants.

4 VI. Production Possibilities Analysis A. Growth can be illustrated with a production possibilities curve (Figure 25.2), where growth is indicated as an outward shift of the curve from AB to CD. 1. Demand must increase to sustain full employment at each new level of possible production. 2. Additional resources that shift the curve outward must be employed efficiently to make the maximum possible contribution to domestic output. 3. For the economy to achieve the maximum increase in value, the optimal combination of goods must be achieved (allocative efficiency). B. The American labor force has increased by 1.5 to 2 million workers per year, raising production capacity. Demand must be high enough to reach full employment, in order to completely realize the production potential. C. Society can increase its real output and income in two fundamental ways: 1. Increasing its inputs of resources 2. Raising the productivity of those inputs D. Real GDP = hours of work x labor productivity (Figure 25.3) 1. Hours of work depends on the length of the workweek and the labor force participation rate the percentage of the working-age population actually in the labor force.

5 2. Labor productivity is determined by technological progress, the quantity of capital goods available to workers, the quality of labor, and the efficiency with which inputs are allocated, combined, and managed. VII. Accounting for Growth A. More labor input is one source of growth. The labor force has grown by 1.6 million workers per year for the past 56 years and accounts for about 1/3 of total economic growth. B. The growth of labor productivity contributed 2/3 of the growth, half of the growth, 2/3 of the growth, all of the growth, and is expected to account for about nearly all of the growth (Table 25.3). C. Factors Responsible for Productivity Growth 1. Technological advance 40 percent of productivity growth results from innovative production techniques, new management methods, and new forms of business organization. Technological advance usually promotes investment in new machinery and equipment. 2. Quantity of capital 30 percent of productivity growth comes from an increase in the availability of capital goods per worker. Infrastructure government investment in highways and other public structures complements private investment. 3. Education and training 15 percent of productivity growth is derived from investment in human capital the knowledge and skills that make a worker productive (Figure 25.4 and Global Perspective 25.1). 4. Economies of scale and improved resource allocation 15 percent of productivity growth occurs as a result of more efficient production, the movement of workers to higherproductivity jobs, and the reduction of trade barriers. D. Consider This Women, the Labor Force, and Economic Growth 1. The percentage of women working in the paid labor force has risen from 40 percent in 1960 to 60 percent today. 2. Greater investments in human capital have raised the productivity of women, raising women s wages and increasing the opportunity cost of staying home.

6 3. Reduced birthrates, growth in industries typically attracting women workers, urban migration, increased availability of part-time jobs, and antidiscrimination laws have all increased labor market access for women. VIII. The Rise in the Average Rate of Productivity Growth A. Labor productivity increased 1.4 percent per year ; productivity significantly increased by 2.8 percent per year This is important because productivity growth is the economy s main route for improving the standard of living (Figure 25.5). B. Many economists believe the higher productivity growth resulted from a significant new wave of technological advance, coupled with global competition. 1. Microchips and information technology are the basis for improved productivity. Many new inventions are based on microchip technology. 2. New firms and increasing returns from economies of scale characterize the new economy. Sources of increasing returns include: a. More specialized inputs b. Ability to spread development costs over large output quantities c. Simultaneous consumption by many customers at the same time d. Network effects make widespread use of information goods more valuable as more consumers use the products e. Learning increases with practice 3. Global competition encourages innovation and efficiency (Global Perspectives 25.2). C. Even if average growth rates in productivity and real output remain higher over time, business cycle fluctuations can still occur. D. Skepticism about long-term continued growth remains, and only time will tell. IX. Is Growth Desirable and Sustainable? A. The Antigrowth View 1. Growth causes pollution, climate change, ozone depletion, and other environmental problems. 2. Growth has not solved sociological problems such as poverty, homelessness, and discrimination; these are problems of the distribution of income, not an increase in income.

7 3. Growth creates a frantic job pace, worker burnout, alienated employees, and worker anxiety and insecurity. 4. High growth rates are unsustainable when resources are depleted more quickly than they can be renewed. B. In Defense of Economic Growth 1. Growth leads to an improved standard of living. 2. Growth may be the only realistic way to reduce poverty, because there is only limited political support for greater redistribution of income. 3. Growth has improved working conditions; machinery is less taxing and less dangerous. 4. Growth allows more leisure and less alienation from work. 5. Environmental concerns are important, but growth actually has allowed more sensitivity to environmental concerns and the ability to deal with them. C. Is growth sustainable? Yes, say proponents of growth. 1. Resource prices are not rising. 2. Growth today has more to do with expansion and application of knowledge and information, so it is limited only by human imagination. X. LAST WORD: Economic Growth in China A. Over the past 25 years, China s real output has grown at an annual rate of nearly 9 percent, quadrupling real output over that period. 1. Rising income has led to more saving, greater capital investment, and more direct foreign investment, which have helped fuel growth. 2. Per capita income has increased at an annual rate of 8 percent since 1980, despite China s population expanding by 14 million people per year. 3. Increased use of capital, improved technology, labor reallocation from agriculture, and increased privatization have all contributed to greater productivity and higher per capita incomes. 4. China s growth has been supported by a dramatic increase in exports ($5 billion in 1978 to $1.2 trillion in 2009). B. Despite its success, China faces a number of important problems. 1. Inflation rates have been high at times (15 to 25 percent per year) because of too much spending relative to capacity. Central banking reform has helped keep inflation low in recent years. 2. State-owned enterprises and banks operate unprofitably, likely necessitating a government bailout. 3. Substantial unemployment and underemployment have resulted from the transition from the agricultural to industrial economy. 4. China has a poor record of protecting intellectual property rights, and it keeps its currency artificially undervalued. These issues have caused tension with the United States and threaten to disrupt trade if they are not resolved. 5. China s growth and development has been uneven, meaning that that the majority of Chinese people have not benefited from the nation s rising incomes.