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Chapter 10 Notes

Chapter 10 Notes - Ch 16 Long—Run Economic firewtii...

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Unformatted text preview: Ch. 16 Long—Run Economic firewtii: Sources and ?oiicies ; 1 1/”) (1 l i "M" A /i Qbfl$ 3 U€rflq§3 3L 3%?5: ESQ J . bl QIV‘KOES w.) 3’ i 1 m... LP‘V‘fi —‘ a J {tooopcu EC. Ni :33 Economic firewiii from iiiiiimfifi Bil. to the Present “\__ \\ - Neolithic Revolution—the transition that signifies a change from a hunter-gatherer lifestyle to an agrarian lifestyle. 0 Allowed for the specialization of skills. 0 Industrial Revolution -- the time period, beginning in England around 1850, where the application of mechanical power to the production of goods led the world to experience significant economic growth. 0 The Industrial Revolution made possibie the sustained increases in real GDP per capita that have allowed some countries to attain a high standard of living. fimaii Differences in Erowiii Estes Ase important? - Growth rates matter because an economy that grows too slowly fails to raise living standards. In the long run, small diflerences in economic growth rates result in big diflerences in living standards. Qcie as? ”3’0 . z i" ‘ r ' ' r g- ‘ ,,. - ._ “TN imofl‘“. ’3 '1 063,1? PE}; Tflf'imxtf’, \V‘ ”i-V‘Qw L37 w in? V‘QQ. :53 {TaJQ'Jit-f‘i win"??? r1355“? « " I . --r s... r -. — Nee-rat» at? Why Be growth Rates Matter? 0 Growth rates matter because an economy that grows too slowiy fails to raise living standards. 0 In some countries in Africa and Asia, very little economic growth has occurred in the past 50 years, resulting in severe poverty. 0 in the poorest countries, more than 100 out of every 1,000 babies die before the age of one "The Rich {iet Either and 0 The world can be divided into two groups: the high-income countries (or the industrial countries) and the poorer countries (or developing countries). 0 The high-income countries include the countries of Western Europe, Australia, Canada, Japan, New Zealand, and the United States. The developing countries include most of the countries of Africa, Asia, and Latin America. In the 19805 and 19903, a small group of countries, mostly East Asian countries such as Singapore, South Korea, and Taiwan, experienced high growth rates and are referred to as the newly industrializing countries. 0 There is a big gap between rich and poor countries. 0 Top 10% of rich countries are 30 times as rich as the poorest 10%. What Beterniines tines Fast Eeenornies grow? a Economists need to develop an economic growth model in order to explain changes in economic growth rates over time Within counties and differences in growth rate among countries. / o The economic growth model is a model that explains changes in real GDP per capita in the long 4' run. 5 I This model focuses on the causes of long-run increases in labor productivity, the quantity of ' goods and services that can be produced by one worker or by one hour of Work. o Economists believe that two key factors determine labor productivity: the quantity of capital per hour worked and the level of technology. .\ / “'fi Ll: it {if} u... w Technological change is a change in the quantity of output a firm can produce using a given quantity of inputs. There are three main sources of technological change: a. Better machinery and equipment, such as the steam engine and computers. b. Increases in human capital, which refers to the accumulated knowledge and skills that workers acquire from education and training or from their life experiences. 0. Better means of organizing and managing production, such as the just-in-time system used by firms to assemble goods at the exact time needed. An economy will have a higher standard of living the more capital it has per hour worked, the better the capital, the more human capital workers have, and the betterjob business managers do in organizing production. Human capital is the accumulated knowledge and skills that workers acquire from education and training or from life experiences. The 53eerorlrer Production ‘r‘unction o The economic growth model can be illustrated by using the 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. V 1" K} L) K “: Citing?esj11,..:%. T, 9 W175? Ozgfyiiia'lfil— C.-C§t"‘:f:§ “5‘71”"? ”'3“ r”: if; .;'-:‘;= 273-“: I increases in the quantity of capital per hour worked result in movements up the per~worker production function. a Equal increases in the amount of capital per hour worked lead to diminishing increases in output per hour worked; the addition of one more unit of one input to a fixed quantity of another input makes output increase by smaller additional amounts. 0 Solow model in WJVWYL.) 3129/ 123+ X : ii t gig) 73%, K::<‘/ H a“, L \flth lfi/‘t! "'- 3.“ l ,7 , .( ‘ \V __ 1“ . %O i av Ids} CU;?U‘C prjif {all}? if; VIWOh—L}: O, A. {2.131313% 3 i? ’2"? £33 if” {Verge—2‘21} 1:13;”? Elmira =_ f Whieh is More important for Eeonomie fieowth: More ilapitei or Teeiinoiogieai flhange? o Technological change helps economies avoid diminishing returns to capital. 9 Another example of technological change is reorganizing how production takes place so as to increase output. Teehnoiogieni {Zhengez The Key to Sustaining Economic growth 8 Technological change shifts up the production function and allows more output per hour worked with the same amount of capital per hour worked. 0 In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change. , _,m - ”ammuwn-AWWMA K L“ e. New {Endogenous} growth Theory _5 El : i- (K; L ,. a} 0 New growth theory, deveioped by Paul Romer, provides 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. Romer argues that the accumulation of knmvledge capital is a key determinant of economic growth. 9 The use of physical capital, such as a computer, is rival because if one firm uses it, other firms cannot, and excludable because the firm that owns the capital can keep other firms form using it. “E (Lyme ion a; L, = nor: a; val e " ' ' 2 JUS’i’ ‘51» blue: ”' ' . I". V1.3; {:3 zit-"v? 0 Government policy can help increase the accumulation of knowledge capital in three ways: d. Protecting intellectual property with patents and copyrights. A patent gives a firm the exclusive right to a new product for a period of 20 years fiom the date the product was invented. Subsidizing research and development. Subsidizing education. rm ieseeh Schumpeter anti {treaties Eestruetien o Endogenous growth theory has revived interest in-the ideas of Joseph Schumpeter and his creative destruction theory on theory. ' - Eeouomie {Emerita in the finitefi States Esonor’nie Grewth in the iiniteri States state 3959: iiast, ”than finer, Then East Again - Productivity in the United States grew rapidly from the end of World War 11 until the mid-19705. 0 Growth then slowed down for 20 years, before increasing again after 1995. o Economists continue to debate the reasons for the growth slowdown of the mid-19705 to mid- 19903. What flamed the Frosinetiyity fiiewiioern of i§73~ii§g433 - Leading explanations for the productivity slowdown are: 0 a) measurement problems, 0 1)) high oil prices 0 c) a decline in labor quality. 0 Because Western Europe and Japan experienced a productivity slowdown at the same time as the United States, explanations that focus on factors affecting only the United States are probably incorrect. "i‘he @retinetiyity Boom: Are We in a "Mesa Eeenon‘iy”? u Some economists argue that the faster growth in productivity beginning in the mid—19905 was due to the development of a “New Economy” based on information technology. 0 Information technology industries, such as computers, semiconductors, cell phones, computer programming, and computer software, have accounted for as much as one—third of the growth in real GD? in recent years. 0 In 1997, real GDP grew by 4.5 percent. Of that increase, 1.5 percentage was due to information technology industries. Why ties Fretinetivity Growth Been Faster in the United States than in {Ether Eenntries? 0 Productivity growth as measured by the average annual growth rate of labor productivity was more rapid in the United States than in the other leading industrial countries during the years between 1996 and 2004. 9 Many economists believe there are two main explanations: a) the greater flexibility of US. labor markets, and b) the greater efficiency of the US. financial system. Why ieo’t the Whole Werifi itich? {’etchfle: Sometimes; trait Net Airways 0 It is essential to discuss why many poor counties have not experienced rapid economic growth. 9 371a economic growth model predicts that poor countries will grow faster than rich countries, resulting in catch-up. ,n k i» “we? “ “do: IKT‘ _ 1.: btj‘ll'S w ‘u-‘Q bcifiwc‘u-xik P fl \=.’ f '13.“; 2"“ -, .7 1 on, , . . , 1" i £25153: W: 5f?) Wart-e Tweeter-353% , {flaw-rt; ’ngl were ;’ o {A C}; Em r? f ‘6 (“,7“th +0 mortal m, roe—“rm Meek; of: z; {attics- ‘ 1 ' '1‘ .' flzflo Gflepi oi if: ethic 4‘1 @99th gems. - Catch-up is the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries. . J 26.5 5’5””! ,>> 't’l/"ifiz-L”t. 0 According to the economic growth model, countries that start with lower levels of GDP per capita should grow faster than countries that start with higher levels of GDP per capita. 0 There has been catch-up among industrial countries. ,3. a. A . ”- M, l 3: all ’= flg“?lfi.fi;§'e§:\t ‘1 a." m 0 Looking worldwide, catch-up Is not shown as predicted by the economic growth model. {‘“C’sr ”El: 5.53 “W“ "=“‘ L” ‘9 WW3 an] \ WW” fier’“ i \\ a e». k) x". v». F’ ”352:? e37 313$": s on Why th’t lifters iotvmlhaerhe £oohtries Experience Rapid growth? 0 Some poor countries do not experience rapid growth for four main reasons: a. Failure to enforce the rule of law — rule of law refers to the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts. 1). Wars and revolutions. 0. Poor public education and health. d. Low rates of saving and investment. 0 Property rights refer to the rights individuals or firms have to the exclusive usc of their property, including the right to buy or sell it. Elise Benefits of filohalization 0 Globalization has aided countries that have opened their economies to foreign trade and investment. 0 Foreign direct investment (FDI) occurs when a corporation purchases or builds a facility in a foreign country. 0 Foreign portfolio investment occurs when an individual or firm purchases stock or bonds issued in another country. 0 Globalization refers to the process of countries becoming more open to foreign trade and 3 investment. Growth Foiicies Enhancing Property Rights anti the iinie of Law (Imé'i’ii’ui'i 0 W5} Governments can attempt to increase economic growth through policies that enhance property rights and the rule of law, improve health and education, subsidize research and development, and provide incentives for saving and investment. Whether continued economic growth is desirable or not is a normative question that cannot be settled by economic analysis. irngsroving iienitii anti Erinsaticn As people’s health improves and they became taller, stronger, and less susceptible to disease, they also become more productive. The rising incomes that result from economic growth can help developing countries deal with brain drain. 0 Brain drain refers to highly educated and successful individuals leaving developing countries for high-income countries. Poiisies with Respect to 'i‘eciinoiogy Government policies that facilitate access to technology are crucial for low—income counties. The easiest way for developing countries to gain access to technology is through foreign direct investment. In high~income countries, government poiicies can aid the growth of technology by subsidizing research and development. ' Poiieies with Respect t9 Saving and investment 0 Governments also increase incentives for firms to engage in investment in physical capital by using investment tax credits. 0 These credits allow firms to deduct from their taxes some fraction of the funds they have spent on investment. is Ecenemie growth fieeé er Bast? Good - The arguments against further economic growth tend to be motivated either by concern about the effects of growth on the environment or by concern about the efi'ects of the giobalization process that has accompanied economic growth in recent years. ...
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