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7
Long-Run Economic Growth: Sources and Policies
Chapter Summary
In the long-run, a country will experience increasing standards of living only if it experiences continuing technological change. This chapter looks at the differences in economic growth rates over time and the differences in growth rates between countries. Becau of diminishing return to capital, sustained growth can only occur with technological change, which allows the economy to produce more output with the same quantities of inputs.
Learning Objectives
When you finish this chapter you should be able to:
1.Describe trends in economic growth in the world. Until 1300 A.D. most people survived with
barely enough to eat or drink. Living standards began to ri significantly only after the Industrial
Revolution began in England in the 1700s. The best measure of a country’s standard of living is its
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level of real GDP per person. Economic growth occurs when real GDP per person increas, thereby
increasing the country’s standard of living.
2.U the economic growth model to explain why growth rates differ between countries. Labour
productivity is the quantity of goods and rvices that can be produced by one worker or by one hour
of work. Economic growth depends on increas in labour productivity. Labour productivity will
increa if there is an increa in the amount of capital available to each worker and if there is an
change in technology. There are three main sources of change in technology: better machinery and
equipment, increas in human capital, and better means of organising and managing production. To
sum up, we can say: an economy will have a higher standard of living the more capital it has per
hour worked, the more human capital its workers have, the better its capital, and the better the job its
business managers do in organising production. The per-worker production function shows the4月份星座
relationship between capital per hour worked and output per hour worked, holding technology
constant. Diminishing returns to capital mean that increas in the quantity of capital per hour
worked will result in diminishing increas in output per hour worked. Technological change shifts
up the per-worker production function, resulting in more output per hour worked at every level of
capital per hour worked. The economic growth model stress the importance of changes in capital
per hour worked and technological change in explaining growth in output per hour worked.
Endogenous growth theory is a model of long-run economic growth that emphasis the way
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technological change is influenced by economic incentives, and so is endogenous, or determined by
the working of the market system. To Joph Schumpeter, the entrepreneur is central to the “creative
destruction” by which the standard of living increas as qualitatively better products replace
existing products.
3.Explain the fluctuations in productivity growth in Australia in the twentieth and twenty-first
centuries. Productivity in Australia grew rapidly from the end of World War II until the mid 1970s.
Growth then slowed down for 20 years, before increasing again after 1995. Economists continue to
Long-Run Economic Growth: Sources and Policies 101 debate the reasons for the growth slowdown of the mid-1970s to mid-1990s. Leading explanations
for the productivity slowdown are: high oil prices, regulated markets and a trade protection. Some
economists argue that the faster growth in productivity beginning in the mid-1990s reflects the
development of a New Economy bad on information technology.
4.Discuss why many poor countries have not experienced rapid economic growth. The economic
growth model predicts that poor countries will grow faster than rich countries, resulting in catch-up.
In recent decades, some poor countries have grown faster than rich countries, but many have not.
There are four main reasons why some poor countries do not experience rapid growth: wars and
revolutions, poor public education and health, failure to enforce the rule of law, and low rates of
saving and investment. Globalisation has aided countries that have opened their economies to
foreign trade and investment.
Chapter Review
Chapter Opener: The Chine Economic Miracle
From 1952 to 1978, real GDP per capita in China grew at slow rate of less than 2 percent per year. In the period from 1979 to 1995, as a result of reforms by Deng Xiaoping, the annual growth rate incread to about 6.5 percent. Since 1995, real GDP per capita has grown at the very rapid rate of more than 9 percent per year. This rapid growth has transformed the Chine economy and greatly incread the standard of living.
Economic Growth Over Time and Around the World
Significant economic growth did not begin until the Industrial Revolution, which started in England around the year 1750. Estimates suggest that growth was about 0.2% per year in the 500 years before the Industrial Revolution and about 1.3% per year in the 100 years after the Industrial Revolution. The Industrial Revolution probably started in England becau of political changes that gave entrepreneurs the incentive to u the important technological inventions of the time, such as the steam engine (e Making the Connection 7.1, page 187).
Growth rates are important becau increasing growth rates allow for higher standards of living, which bring not only larger lections of goods but also better access to things such as health and education rvices.
Helpful Study Hints
To calculate average annual rates of growth in real GDP (g) over a long time period, u the formula:
g = [(real GDP E/real GDP B)1/n - 1] x 100
where n is the number of years between year B and year E.西红柿鸡蛋面片
So if real GDP increas from $1,777 billion (real GDP B) in 1950 to $10,756 billion (real GDP E) in
2004 (n = 2004 - 1950 = 54) then the average annual growth rate is:
g = [($10,756/$1,777)1/54 - 1] x 100 = 3.4%
102 Chapter 7
What Determines How Fast Economies Grow?
An economic growth model explains growth rates in real GDP per capita, or per person. Growth requires that the average worker produce more goods per time period. By definition, this means labour productivity increas over time. Labour productivity grows with growth in the amount of capital per worker and with technological change through better machinery and equipment, increas in human capital, and better means of organising production. The per-worker production function exhibits diminishing returns to capital as long as technology does not change. Diminishing returns to capital are illustrated in textbook Figure 7.3 below.
Increas in the capital-labour ratio, given the level of technology, will result in increas in output per worker. However, becau of diminishing returns to capital, as the capital-labour ratio grows, the size of the increas in output per worker will get smaller. Long-term economic growth needs more t
han just growth in capital. Also needed is technological change. Technological change allows the per worker production function to shift, generating more output with the same level of resources. Shifts in the per-worker production function due to technological changes are shown in textbook Figure 7.4 below.
Long-Run Economic Growth: Sources and Policies 103
马国利Helpful Study Hints
Changes in capital per worker cau movements along a single per worker production function, while changes in technology cau shifts in the per worker production function. An upward shift means that the economy can produce more with the same level of capital per worker.
Over time, living standards can increa only if a country experiences continual technological change. Paul Romer, an economist at Stanford University, suggests that technological change is influenced by economic incentives. Romer’s approach is referred to as endogenous growth theory, or the new growth theory. This theory suggests that the accumulation of knowledge capital is a key determinant of economic growth becau knowledge capital is subject to increasing returns, becau once discovered knowledge becomes available to everyone. Government policy can help increa the accumulation of knowledge capital by protecting intellectual property rights with patents and copyrights, subsidising rearch and development, and subsidising education. Economic Growth in Australia
Economic growth rates in Australia have varied over time. After colonisation in 1788, economic growth accelerated in the cond half of the nineteenth century as people took advantage of Australi
a’s natural resources, with annual growth averaging 4.7% between 1861-91. However, the effects of excessive speculation, droughts, World War I and the Great Depression led to much slower growth between 1891-1939 (down to an annual average of 2.2%). The period after World War II until 1970 is known as the ‘Long Boom’. During this period economic growth averaged 4.6% per year. In the 1970s and 1980s, labour productivity and hence
104 Chapter 7
economic growth slowed due to the effect of high oil prices, highly regulated markets and trade protection, with economic growth only averaging 3.1%. Since the early 1990s Australia has enjoyed an almost unbroken run of sustained economic growth, led primarily by greater flexibility in labour markets and other microeconomic reforms.
Helpful Study Hint
Remember, as we saw in Chapter 6, the financial system is where the funds of savers are loaned to borrowers. This process creates the supply of and demand for loanable funds.
Why Isn’t the Whole World Rich?
The economic growth model tells us that economies grow when the quantity of capital per hour worked increas and when technological change takes place. Growth in capital and technology will have their biggest payoff in poorer economies. This suggests that poorer countries will grow faster than rich countries. The poorer countries growing faster than the rich countries is called catch-up or convergence. The growth data suggests that convergence applies to some, but not all countries. Economists have suggested veral reasons why a number of low income countries have not experienced rapid growth.
A legal system that does not enforce contracts and protect property rights.
Wars and revolutions.长焦微距
Poor public education and health.
Slow technological development
Low levels of savings and investment.
Globalisation, the process of countries being more open to foreign trade and investment, can help poorer countries that have low levels of domestic savings and investment and that lack access to the
latest technologies (e Making the Connection 7.3 for an example of this from Bangladesh).
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Solved Problems
Chapter 7 in the textbook includes a Solved Problem to support learning objective 2 (“U the economic growth model to explain why growth rates differ across countries”). The following Solved Problems support learning objective 2 and 4.
Solved Problem 7.2 Supports Learning Objective 2: U the economic growth model to explain why growth rates differ across countries.
Supply Shock
Suppo a 7.6 magnitude earthquake hits New South Wales. The earthquake wipes out a significant part of New South Wales’s capital stock. Events of this type are sometimes referred to as “supply shocks” becau of their effect on the ability of firms to supply goods and rvices. U the per worker production function to predict the effects of this supply shock on output per worker.
