MacroEcomonics principles, application, and tools 7th edition by sullivan chapter 08

Global Warming, Rich Countries and Poor Countries Does economic growth necessarily cause more inequality?. Growth Need Not Cause Increased Inequality How can we use economic analysis to

Why do Economies

Grow?

Why do Economies Grow?

For many people, the thought of poverty conjures up poor, African children,

but since 1995, African poverty rates have been falling steadily.

8

Why do Economies

Grow?

1

2

How my global warming affect economic growth?

Global Warming, Rich Countries and Poor Countries

Does economic growth necessarily cause more inequality?

Growth Need Not Cause Increased Inequality

How can we use economic analysis to understand the sources of growth in different countries?

Sources of Growth in China and India

How much did the information revolution contribute to U.S productivity growth?

Growth Accounting and Information Technology

How do varying political institutions affect economic growth?

The Role of Political Factors in Economic Growth

Did cultural or evolution spark the Industrial Revolution?

Culture, Evolution, and Economic Growth

Why are clear property rights important for economic growth in developing countries?

Lack of Property Rights Hinders Growth in Peru

● human capital

The knowledge and skills acquired by a worker through education and experience and used to produce goods and services

Why do Economies

Grow?

 FIGURE 8.1

What Is Economic Growth?

8.1 ECONOMIC GROWTH RATES (cont’d)

Economic growth means

an expanded production

possibilities curve (PPC).

Why do Economies

Measuring Economic Growth

● real GDP per capita

Gross domestic product per person adjusted for changes in prices It is the usual measure of living standards across time and between countries

Measuring Economic Growth

ECONOMIC GROWTH RATES (cont’d)

Why do Economies

Comparing the Growth Rates of Various Countries

ECONOMIC GROWTH RATES (cont’d)

The effects of global warming on economic development are very complex

▪ The effect of increases in temperature seem to be confined to poor countries

▪ In Latin and South America, each 1 degree Celsius increase resulted in a 1.2 to 1.9 percent decline in per capita income

▪ Exports also declined between 2.0 and 5.7 percent.

▪ By deferring global warming into the future, poor countries may have time to develop and avoid the worst of the impact.

A P P L I C A T I O N 1

Each point on the graph represents a

different currently developed country

Notice that the countries with the lowest

per capita incomes in 1870 (shown

along the horizontal axis) are plotted

higher on the graph.

In other words, the tendency was for

countries with lower levels of initial

income to grow faster.

ECONOMIC GROWTH RATES (cont’d)

Why do Economies

Grow?

GROWTH NEED NOT CAUSE INCREASED INEQUALITY

APPLYING THE CONCEPTS #2: Does economic growth

necessarily cause more inequality?

Economists believed that as a country developed, inequality within a country followed an inverted “U” pattern—inequality initially increased and then narrowed over time Recent research challenges the assumption that this phenomenon is solely the result of growth:

▪ Inequality increased from 40 percent at the beginning of the 1920s to 45 percent through the end of the Great Depression

▪ During World War II inequality fell to 32 percent by 1944 and remained at that level until the early 1970s, at which time it began to again increase

▪ Wage and price controls during World War II reduced differentials in wages and salaries and thereby reduced inequality

▪ After the 1970s, salaries at the top of the income distribution increased sharply

Inequality does not naturally accompany economic development Other factors also play a role:

▪ Social norms

▪ Perceived fairness of compensation

▪ Nature of the tax system

A P P L I C A T I O N 2

An increase in the supply of

capital will shift the production

function upward, as shown in

Panel A, and increase the

demand for labor, as shown in

Panel B

Real wages will increase from

W1 to W2 , and potential output

will increase from Y1 to Y2.

Why do Economies

Saving and Investment

● saving

Income that is not consumed

CAPITAL DEEPENING (cont’d)

If the government raises taxes by

$100 and the people tend to save

20 percent of changes in income,

then private savings and investment

will fall by $20

However, if the government invests

CAPITAL DEEPENING (cont’d)

How Do We Measure Technological Progress?

Using Growth Accounting

•Growth accounting is a useful tool for understanding different aspects of

•Either a slowdown in technological progress or other factors not directly included in the analysis, such as higher worldwide energy prices, must have been responsible

•This led economists to suspect that higher energy prices were the primary explanation for the reduction in economic growth

SOURCES OF GROWTH IN CHINA AND INDIA

APPLYING THE CONCEPTS #3: How can we use economic analysis to

understand the sources of growth in different countries?

China and India are the two most populous countries and have also grown very rapidly in recent years.

From 1978 to 2004, GDP in China grew at the rate of 9.3 percent per year while India’s GDP grew at a lower rate of 5.4 percent per year

Economists Barry Bosworth from the Brookings Institution and Susan

Collins from the University of Michigan used growth accounting to answer this question

▪ China’s rapid growth was caused by more rapid accumulation of physical capital and more rapid technological progress

A P P L I C A T I O N 3

Why do Economies

Grow?

GROWTH ACCOUNTING AND INFORMATION TECHNOLOGY

APPLYING THE CONCEPTS #4: How much did the information

revolution contribute to U.S productivity growth?

 FIGURE 8.6

U.S Annual Productivity Growth, 1959–2007

In recent years, there has been a resurgence of productivity growth in part

caused by the information technology revolution.

A P P L I C A T I O N 4

Why do Economies

Research and Development Funding

▼ FIGURE 8.7

Research and Development as a Percent of GDP, 1999

The United States spends more total money than any other country on research and

Why do Economies

Monopolies That Spur Innovation

● creative destruction The view that a firm will try to come up with new products and more efficient ways to produce products to earn monopoly profits

The Scale of the Market

•Adam Smith stressed that the size of a market was important for economic development

•In larger markets, firms have more incentives to come up with new products and new methods of production The lure of profits guides the activities of firms, and larger markets provide firms the opportunity to make larger profits

•This supplies another rationale for free trade With free trade, markets are larger, and there is more incentive to engage in technological progress

WHAT CAUSES TECHNOLOGICAL PROGRESS? (cont’d)

Some economists have emphasized that innovations come about through

inventive activity designed specifically to reduce costs This is known as

induced innovation.

New Growth Theory

● new growth theory

TECHNOLOGICAL PROGRESS? (cont’d)

Education can contribute to economic growth in two ways

▪ First, the increased knowledge and skills of people complement our current

investments in physical capital

▪ Second, education can enable the workforce in an economy to use its skills to

develop new ideas or to copy ideas or import them from abroad

Why do Economies

Grow?

THE ROLE OF POLITICAL FACTORS IN ECONOMIC

GROWTH

APPLYING THE CONCEPTS #5 How do varying political

institutions affect economic growth?

Growth can, and has, occurred in both authoritarian and participatory governments

Transformative economic growth like the Industrial Revolution usually requires

CULTURE, EVOLUTION AND ECONOMIC GROWTH

APPLYING THE CONCEPTS #6: Did culture or evolution spark

the Industrial Revolution?

In studying the economic history of England before the Industrial Revolution,

Professor Clark discovered an interesting fact

▪ He found that children of the more affluent members of English society were

more likely to survive than those of the less affluent

▪ With the slow growth of population over several centuries, this differential

survival of the wealthy had the effect of creating downward mobility for the

rich, as their sons and daughters increasingly populated the society

This change had profound effects on English society The cultural habits of the

rich filtered through the entire society

▪ Social virtues such as thrift, prudence, and hard work became more

commonplace, while impulsive and violent behaviors were reduced

▪ Eventually, these changes in culture became sufficiently pronounced that

a qualitative change took place in society

What is the connection between property rights and economic growth?

• Without clear property rights, there are no proper incentives to invest in the future—the essence of economic growth

What else can go wrong?

• Governments in developing countries often:

• Adopt policies that effectively tax exports

• Pursue policies that lead to rampant inflation

• Enforce laws that inhibit the growth of the banking and financial sectors

Results:

• Fewer exports

• Uncertain financial environment

• Reduced saving and investmentWith the right incentives, individuals and firms in developing countries will take

actions that promote economic growth

Why do Economies

capital deepening convergence

creative destruction growth accounting growth rate

human capital

labor productivity new growth theory real GDP per capita rule of 70

saving technological progress

Holding labor constant, increases in the stock of capital increase output, but at a decreasing rate.

► FIGURE 8A.3

Basic Growth Model

Starting at K0, saving

exceeds depreciation The

stock of capital increases.

This process continues

until the stock of capital

reaches its long-run

equilibrium at K*.

A MODEL OF CAPITAL

DEEPENING

A P P E N D I X A

Why do Economies

Grow?

FIGURE 8A.4

Increase in the Saving Rate

A higher saving rate will lead to a higher stock of capital in the long run Starting from an

A MODEL OF CAPITAL

DEEPENING

A P P E N D I X A