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In this chapter you will see how economic growth differs around the world, consider why productivity is the key determinant of a country’s standard of living, analyze the factors that determine a country’s a country’s, examine how a country’s policies influence its productivity growth.
9 THE REAL ECONOMY IN THE LONG RUN Production and Growth Copyright â 2004 South-Western 25 Production and Growth Acountrysstandardoflivingdependsonits abilitytoproducegoodsandservices Copyright â 2004 South-Western Production and Growth Withinacountrytherearelargechangesinthe standardoflivingovertime Copyright â 2004 South-Western Production and Growth In the United States over the past century, average income as measured by real GDP per person has grown by about 2 percent per year Copyright © 2004 South-Western Production and Growth • Productivity refers to the amount of goods and Productivity services produced for each hour of a worker’s time • A nation’s standard of living is determined by the productivity of its workers Copyright © 2004 South-Western Table The Variety of Growth Experiences Copyright©2004 South-Western ECONOMIC GROWTH AROUND THE WORLD • Living standards, as measured by real GDP per person, vary significantly among nations Copyright © 2004 South-Western ECONOMIC GROWTH AROUND THE WORLD • The poorest countries have average levels of income that have not been seen in the United States for many decades Copyright © 2004 South-Western ECONOMIC GROWTH AROUND THE WORLD Annualgrowthratesthatseemsmallbecome largewhencompoundedformanyyears. Compoundingreferstotheaccumulationofa growthrateoveraperiodoftime Copyright â 2004 South-Western Education • For a country’s longrun growth, education is at least as important as investment in physical capital • In the United States, each year of schooling raises a person’s wage, on average, by about 10 percent • Thus,onewaythegovernmentcanenhancethe standardoflivingistoprovideschoolsand encouragethepopulationtotakeadvantageofthem Copyright â 2004 South-Western Education Aneducatedpersonmightgeneratenewideas abouthowbesttoproducegoodsandservices, whichinturn,mightentersocietyspoolof knowledgeandprovideanexternalbenefitto others Copyright â 2004 South-Western Education One problem facing some poor countries is the brain drain—the emigration of many of the most highly educated workers to rich countries Copyright © 2004 South-Western Property Rights and Political Stability • Property rights refer to the ability of people to exercise authority over the resources they own • An economywide respect for property rights is an important prerequisite for the price system to work • It is necessary for investors to feel that their investmentsaresecure Copyright â 2004 South-Western Free Trade Tradeis,insomeways,atypeoftechnology A country that eliminates trade restrictions will experience the same kind of economic growth that would occur after a major technological advance Copyright © 2004 South-Western Free Trade • Some countries engage in . . • . . inwardorientated trade policies, avoiding interaction with other countries. • . . outwardorientated trade policies, encouraging interaction with other countries Copyright © 2004 South-Western Research and Development • The advance of technological knowledge has led to higher standards of living • Most technological advance comes from private researchbyfirmsandindividualinventors Governmentcanencouragethedevelopmentofnew technologiesthroughresearchgrants,taxbreaks, andthepatentsystem Copyright â 2004 South-Western CASE STUDY: The Productivity Slowdown and Speedup • From 1959 to 1973 productivity grew at a rate of 3.2 percent per year • From1973to1995productivitygrewbyonly 1.5percentperyear Productivityacceleratedagainin1995,growing by2.6percentperyearonaverageduringthe nextsixyears Copyright â 2004 South-Western CASE STUDY: The Productivity Slowdown and Speedup • The causes of the changes in productivity growth are elusive • The slowdown cannot be traced to the factors of production that are most easily measured • Many economists attribute the slowdown and speedup in economic growth to changes in technology and the creation of new ideas Copyright © 2004 South-Western Figure The Growth in Real GDP Per Person Growth Rate (percent per year) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1870– 1890– 1910– 1930– 1950– 1970– 1890 1910 1930 1950 1970 1990 1990– 2000 Copyright©2003 Southwestern/Thomson Learning Population Growth Economistsandothersocialscientistshave longdebatedhowpopulationgrowthaffectsa society Copyright â 2004 South-Western Population Growth • Population growth interacts with other factors of production: • Stretching natural resources • Diluting the capital stock • Promotingtechnologicalprogress Copyright â 2004 South-Western Summary Economicprosperity,asmeasuredbyrealGDP perperson,variessubstantiallyaroundthe world • The average income of the world’s richest countries is more than ten times that in the world’s poorest countries • The standard of living in an economy depends on the economy’s ability to produce goods and services Copyright © 2004 South-Western Summary • Productivity depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers • Government policies can influence the economysgrowthrateinmanydifferentways Copyright â 2004 South-Western Summary Theaccumulationofcapitalissubjectto diminishingreturns Becauseofdiminishingreturns,highersaving leadstoahighergrowthforaperiodoftime, butgrowthwilleventuallyslowdown Alsobecauseofdiminishingreturns,thereturn tocapitalisespeciallyhighinpoorcountries Copyright â 2004 South-Western .. .Production and Growth Copyright © 2004 South-Western 25 Production and Growth Acountrysstandardoflivingdependsonits abilitytoproducegoodsandservices Copyright â 2004 South-Western Production. .. â 2004 South-Western Production and Growth • Productivity refers to the amount of goods and Productivity services produced for each hour of a worker’s time • A nation’s standard of living is determined by ... the state of technology, (A) Copyright © 2004 South-Western ECONOMIC GROWTH AND PUBLIC POLICY Governmentscandomanythingstoraise productivityandlivingstandards Copyright â 2004 South-Western ECONOMIC GROWTH