Chapter 11 Flashcards
no sustainable economic growth occurred before
the middle ages
significant economic growth did not really begin until the
industrial revolution
before the industrial revolution
production of most goods had relied on human or animal power
in the long run,
small differences in economic growth rates result in big differences in living standards
outside of developing countries there are newly industrialized countries
1980s &1990s : singapore, south korea, taiwan
Today: china, india
economic growth model
seeks to explain growth rates in real GDP per capita over the long run
two main factors of labor production
- the quantity of capital per hour worked
- level of technology
our model will concentrate on changes in
quantity of capital and technological changes
technological change
a change in the quantity of output a firm can produce using a given quantity of inputs (NOT the same as just getting more physical capital)
three main sources of technological change
better machinery and equipment, increases in human capital, better means of organizing and managing production
better machinery and equipment
inventions have allowed faster economic growth
ex. steam engines, machine tools, electricity, computers, internet
increases in human capital
human capital = training, education
-growth itself allows more human capital to accumulate
better means of organizing and managing production
if managers can do a better job of organizing production, then labor productivity can increase
making sure that labor is working on exactly what is needed and not too many people hired unneeded production
per-worker production function- real GDP per hour worked
Y / L
per-worker production function- capita per hour worked
K / L
the first units of capital would be the most effective, allowing
output per hour to increase most
- go from K = 0 to K = 1 (output will greatly increase)
subsequent increases in K would result in
diminishing returns
diminishing returns
smaller increases in output resulting from increasing one factor of production progressively higher while keeping the other factors of production constant
keep L the same and keep adding K
see further increasing in K do not add much to the output per worker
if a country is relatively lacking in capital- like many of the developing countries
then, increase in K will be very effective at increasing Y / L
in countries where the amount if capital is already relatively high
then, technology would increase, which is more effective in increasing Y / L
Solow Growth Model
developed by Nobel Laureate Robert Solow in the 1950s, did not seek to explain technological change, instead treating it as random
- but was great if/when technology change happened
new growth theory
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
knowledge capital is nonrival and nonexcludable,
a public good, results in increasing returns (not at the firm level, but at the economy level)
physical capital is rival and exclusive,
a private good, and this results in its diminishing returns
increases in knowledge capital result from
research and development, and other technological advances
free riding
benefitting from goods and services you do not pay for
public goods, such as knowledge capital generation, results in
free riding
the public good nature of knowledge capital leads to a role for government policy in
protecting intellectual property with parents and copyrights, subsidizing research and development, subsidizing education
macroeconomics, the correcting of a positive externality
reward firms that create new knowledge that benefits us all
free markets and proper incentives create
growth
government can allow the markets and incentives to
function in ways that foster growth
governments seek to protect intellectual property through the use of
patents and copyrights
allowing firms to benefit from their own research and development increases their incentive to perform it
patents
the exclusive right to produce a produce for a period of 20 years from the date the patent is applied for, designed to help balance the chance for firm to benefit from its invention against the need of society to benefit from it
Copyrights
granting the exclusive right to use the creation during and 70 years after the creators’ lifetime
governments might perform research directly
like NASA and the national institutes of health
governments might perform research directly can also
subsidize researchers at institutions like universities, can provide tax-incentive to firms performing research and development
if firms provide technically training , they recover
costs by paying trainee workers lower wages, decreasing the incentive for workers to take such jobs
a solution to this problem?
government subsidize education, training
growth model: gale of creative destruction examples
the automobile replace the horse-drawn carriage, online shopping “destroyed malls”, streaming may destroy blu-ray
is the destruction of past technologies bad?
no, losses (costs) are absorbed by a small few and may be temporary , benefits are given to many, and are long lasting
the entrepreneurs according to schumpeter
central to economic growth; profits provide entrepreneurs the incentives for bringing resources together and take risks
improvements in service comes through quality
differences which is hard to measure
america concentrated more on quality-of-life issues
bought quality of life “luxury” goods, other higher-income countries had similarly timed slowdowns
today: slow growth ? maybe
low population growth leads to less housing demand and IT requires less capital today, and capital is cheaper
some economists argue that changes in quality of services have been particularly important over the last few decades,
only examining GDP growth has understated the actual growth of the economy
what casts doubt on the future of growth in the us
improving consumer products rather than improving labor productivity
why will poor countries grow faster than rich countries
- the effect of additional K is greater for countries with less K
- greater advances in technology are immediately available to poorer countries
prediction of growth model graph
less developed countries will “catch up” to rich countries
why don’t we just go in and build a bunch of factories un Haiti and sub-saharan africa
we tried that many many times and it did not work
four factors why many low-income countries are growing so slowly
- failure to enforce the rule of law
- wars and revolutions
- poor public education and health
- low rates of saving and investment
rule of law
the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts
for entrepreneurs in a market economy to succeed, the government must guarantee
property rights
property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy and sell, otherwise entrepreneurs will not risk starting a business
if a property is state owned
then no incentives to work hard or innovate
ex. soviet union and north korea
foreign direct investment
the purchase or building by a corporation of a facility in a foreign country
foreign portfolio investment
the purchase by an individual or a firm of stocks or bonds issued in another country
globalization
the process if countries becoming more open to foreign trade and investment
countries embracing globalization experienced
much higher rates of growth than countries that didn’t
microloans
given to poorer countries to start businesses, about $25, sort of like a small scale shark tank
what sort of actions can governments take to encourage growth?
government can provide the institutions to allow entrepreneurship & firms thrive
enhancing property rights and the rule of law
independent courts, eliminate corruption and allow individuals to have private property
health care and education have increasing returns
prevents “brain drain” where educated people leave countries
technological changes important for capital growth
low-income countries can encourage technological change by encouraging foreign direct investment
governments can encourage savings and investment
tax incentives, like tax directed savings plans, or investment kaw credits
costs to economic growth
pollution, deforestation, depletion of natural resources, diminishment of distinctive cultures, big firms “taking advantage” of poor countries and cheaper labor
arguments of economic growth are normative
most economists agree that the benefits if growth for outweigh any possible costs
