copyright © 2002 by thomson learning, inc. a lecture presentation in powerpoint to accompany...
TRANSCRIPT
Copyright © 2002 by Thomson Learning, Inc.
A Lecture Presentation in PowerPoint
to accompany
Exploring EconomicsSecond Edition
by Robert L. Sexton
Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark used herein under license.
ALL RIGHTS RESERVED. Instructors of classes adopting EXPLORING ECONOMICS, Second Edition by Robert L. Sexton as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic
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Printed in the United States of America ISBN 0030342333
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19.1 Economic Growth
John Maynard Keynes primarily concerned with explaining and
reducing short‑term fluctuations in the level of business activity
once said, “in the long run we are all dead.” He wanted to smooth out the business
cycle, largely because of the implications that cyclical fluctuations had for buyers and sellers in terms of unemployment and price instability.
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19.1 Economic Growth
Keynes’ concerns were important and legitimate.
At the same time, his flippant remark about the long run ignores the fact that human welfare is greatly influenced by long-term changes in a nation's capacity to produce goods and services.
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19.1 Economic Growth
Emphasis on the short-run business cycle ignores the longer term dynamic changes that affect output, leisure, real incomes and life styles.
Many would argue that in the long run, economic growth is a crucial determinant of well-being.
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Growth Versus StabilityR
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19.1 Economic Growth
Important questions we wish to explore about economic growth include: What are the determinants of long-run
economic change in our ability to produce goods and services?
What are some of the consequences of rapid economic change?
Why are some nations rich while others are poor?
Does growth in output improve our economic welfare?
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19.1 Economic Growth
Economic growth is usually measured by the annual percent change in real output of goods and services per capita (real GDP per capita).
Along the production possibilities curve, the economy is producing at its potential output.
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19.1 Economic Growth
How much the economy will produce at its potential output, sometimes called its natural level of output, depends on the quantity and quality of an economy’s resources, including labor, capital, and natural resources.
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19.1 Economic Growth
Technology can increase the economy’s production capabilities.
Improvements in and greater stocks of land, labor, and capital can shift out the production possibilities curve.
Another way of saying that economic growth has shifted the production possibilities curve out is to say that growth has increased potential output.
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Consumer Goods0
Economic Growth and the Shifting Production Possibilities Curves
Cap
ital G
oods
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19.1 Economic Growth
A nation with greater economic growth will end up with a much higher standard of living, ceteris paribus.
A simple formula called the Rule of 70 can tell how long it will take a nation to double its output. The number of years necessary is
approximately equal to the nation’s growth rate divided into 70.
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19.1 Economic Growth
The “richest” or “most-developed” countries today have many times the per capita output of the “poorest” or “least-developed” countries.
The international differences in income, output, and wealth are striking and have caused a great deal of friction between developed and less-developed countries.
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Growth in Real Per Capita GDP, Selected Industrial Countries
United States 2.3% 2.1%Japan 3.5 0.9Germany 2.4 1.4France 2.0 1.7Italy 2.1 1.8United Kingdom 2.4 2.5Canada 1.1 2.1
Ten-Year Averages
1982–1991 1992–2001
SOURCE: International Monetary Fund, World Economic Outlook, September 2000
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19.2 Determinants of Economic Growth
Many economists have had theories of economic growth.
Adam Smith The wealth of nations is derived from
accumulation of capital, which results from thrift and savings.
He thought specialization and division of labor were important.
He criticized then-accepted ideas of mercantilism. barriers to trade between people and countries need for various types of governmental regulation
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19.2 Determinants of Economic Growth
Karl Marx Essentially, all value ultimately derives
from labor and economic growth, therefore, depends on increasing contributions by labor.
Joseph Schumpeter Growth depends to a considerable extent
on innovation and technological change, for which the role of managerial or entrepreneurial skills was particularly vital.
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19.2 Determinants of Economic Growth
Thomas Malthus In the long run, per capita economic growth
will not occur at all! Montesquieu
A French philosopher, he argued that output levels are lower in tropical zones, partly because work effort is less intense in the heat of the tropics.
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19.2 Determinants of Economic Growth
Many separate explanations of economic growth have been proposed, but none of them, by themselves, can completely explain economic growth.
However, each of the explanations may be part of a more complicated reality.
Economic growth is a complex process involving many important factors, no one of which completely dominates.
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19.2 Determinants of Economic Growth
Nearly everyone agrees that several factors have contributed to economic growth in some or all countries. growth in the quantity and quality of labor
resources used increase in the use of inputs provided by
land growth in physical capital inputs technological advances allowing greater
output than previously possible
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19.2 Determinants of Economic Growth
Labor is needed in all forms of productive activity.
Other things being equal, an increase in labor input does not necessarily increase output per capita.
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19.2 Determinants of Economic Growth
If the increase in labor input results from an increase in population, per capita growth might not occur because the increase in output could be offset by the increase in population.
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19.2 Determinants of Economic Growth
If a greater proportion of the population works or if workers put in longer hours, output per capita will increase— assuming that the additional work activity adds something to output.
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19.2 Determinants of Economic Growth
Qualitative improvements in workers (learning new skills, for example) can also enhance output.
It has become popular to view labor as "human capital" that can be augmented or improved by education and on‑the‑job training.
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19.2 Determinants of Economic Growth
Abundant natural resources also can enhance output whereas a limited resource base is an important obstacle to economic growth.
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19.1 Economic Growth
Resources are not the whole story. The natural resource base can affect
the initial development process, but sustained growth is influenced by other factors.
There is nearly universal agreement that capital formation has played a significant role in the economic development of nations.
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19.2 Determinants of Economic Growth
Technological advances stem from man's ingenuity and creativity in developing new ways of combining the factors of production to enhance the amount of output from a given quantity of resources.
It involves invention and innovation. Innovation is the adoption of a new product
or process.
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19.2 Determinants of Economic Growth
New technology must be introduced into productive use by managers or entrepreneurs who must weigh their estimates of benefits of the new technology against their estimates of costs.
The entrepreneur is an important economic factor in the growth process.
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19.2 Determinants of Economic Growth
Technological advances permit us to economize on one or more inputs used in the production process.
It can permit savings of labor, as occurs when a new machine is invented that does the work of many workers.
It can also be land (natural resource) saving or even capital saving.
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19.2 Determinants of Economic Growth
Nuclear fission has permitted us to build power plants that economize on the use of coal, a natural resource.
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19.2 Determinants of Economic Growth
The reduction in transportation time that accompanied the invention of the railroad allowed businesses to reduce the capital they needed in the form of inventories. Because goods could be obtained quickly,
businesses could reduce the stock kept on their shelves.
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19.3 Raising the Level of Economic Growth
Economic growth means more than an increase in the real income (output) of the population.
Changes in output are accompanied by a number of other important changes.
There are a number of policies that a nation can pursue to increase economic growth.
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19.3 Raising the Level of Economic Growth
One of the most important determinants of economic growth is the saving rate. In order to consume more in the future, we
must save more now. Generally speaking, higher levels of saving
will lead to higher levels of investment and capital formation and, therefore, to greater economic growth.
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19.3 Raising the Level of Economic Growth
Sustained rapid economic growth is associated with high rates of saving and investment around the world.
Investment alone does not guarantee economic growth, which hinges importantly on the quality and the type of investment as well as on investment in human capital and improvements in technology.
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10
9
8
7
6
04015 20 25 30 350
Gross National Saving (percent of GDP)
Saving Rates and GDP Growth During High-Growth Periods in Selected Economies
Vietnam1991–94 Greece
1961–73
Botswana1979–94
Fed. Rep. ofGermany1951–55
Japan1961–73
China1978–94
Rep. of Korea1983–94
Singapore1961–94
Hong Kong1961–94
Malaysia1987–94
Thailand1987–94
Indonesia1968–94
Portugal1965–73
Chile1987–94
Mauritius1985–94
Côte d’Ivoire1968–78
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19.3 Raising the Level of Economic Growth
Some scholars believe that the importance of research and development (R&D) is understated.
can include new products, management improvements, production innovations, or simply learning by doing
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19.3 Raising the Level of Economic Growth
It is clear that investments in R&D and rewarding innovators with patents has paid big dividends in the past 50 to 60 years.
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19.3 Raising the Level of Economic Growth
There is an important link between research and development and capital investment.
When capital depreciates over time, it is replaced with new equipment that embodies the latest technology. Consequently, R&D may work hand-in-
hand with investment to improve growth and productivity.
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19.3 Raising the Level of Economic Growth
Economic growth rates tend to be higher in countries where the government enforces property rights.
In most developed countries, property rights are effectively protected by the government, but in developing countries, this is not normally the case.
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19.3 Raising the Level of Economic Growth
And if the government is not enforcing property rights, the private sector must respond in costly ways that stifle economic growth. private security bribes corruption confiscation the risk of takeovers from a new
government
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19.3 Raising the Level of Economic Growth
Free Trade can lead to greater output because of the principle of comparative advantage. If two nations or individuals with different
resource endowments and production capabilities specialize in producing a smaller number of goods and services, then they are relatively better at and engage in trade.
Both parties will benefit as total output rises.
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19.3 Raising the Level of Economic Growth
Education, investment in human capital, is just as important as improvements in physical capital.
Accepting a reduction in current income to acquire education and training can increase future earning ability, which can raise the standard of living.
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19.3 Raising the Level of Economic Growth
With economic growth, illiteracy rates fall and formal education grows.
The correlation between per capita output and the proportion of the population that is unable to read or write is striking.
Improvements in literacy stimulate economic growth by reducing barriers to the flow of information and raise labor productivity.
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19.3 Raising the Level of Economic Growth
Since children in developing countries are an important part of the labor force at a young age, there is a higher opportunity cost of education in terms of forgone contribution to family income.
Education is a consequence of economic growth, becoming a consumption good, as well as a cause of economic growth, creating human capital.
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Literacy and Economic Development
United States $30,200 97%Japan 24,000 99Italy 21,500 97Brazil 6,300 81India 1,600 52Haiti 1,070 53Ethiopia 530 28NOTE: The literacy rates are based on the ability to read and write at an elementary school level.
SOURCE: Time Almanac, 2000.
CountryOutput
per CapitaAdult
Literacy Rates
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19.4 Population and Economic Growth
The impact of population growth on per capita economic growth is far from obvious.
If population were to expand faster than output, per capita output would fall; population growth would be growth‑inhibiting.
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19.4 Population and Economic Growth
With a greater population comes a greater labor force.
Economies of large scale production may exist in some forms of production, so larger markets associated with greater populations lead to more efficient-sized production units.
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19.4 Population and Economic Growth
Very rapid population growth did not seem to impede American economic growth in the mid-19th century.
America's economic growth until at least World War I was accompanied by population growth that was among the highest in the world for the time.
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19.4 Population and Economic Growth
In many of the less-developed countries today, rapid population growth threatens sustained economic growth.
These are countries that have low land-labor ratios and are predominantly agricultural with very modest natural resources, especially land.
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19.4 Population and Economic Growth
Two centuries ago, the English economist Rev. Thomas Malthus formulated a model that predicted that per capita economic growth would eventually become negative, and that wages would ultimately reach an equilibrium at a subsistence level, or just large enough to provide enough income to stay alive.
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19.4 Population and Economic Growth
Malthus assumed an agricultural society where goods were produced by two inputs, land and labor.
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19.4 Population and Economic Growth
Malthus assumed that the supply of land was fixed in quantity. He assumed that the sexual desires of
humans would work to increase population. As population increased, the number of
workers would increase. Thus with greater labor inputs available,
output would also go up.
continued . . .
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19.4 Population and Economic Growth
At some point output would increase by diminishing amounts because of the law of diminishing returns, which states that if you add variable amounts of one input (in this case labor) to fixed quantities of another input (in this case land), output would rise but by diminishing amounts.
As the land‑labor ratio falls, there is less land per worker.
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19.4 Population and Economic Growth
Fortunately, Malthus’ theory proved spectacularly wrong for much of the world.
While the law of diminishing returns is a valid concept, Malthus' other assumptions were unrealistic. Agricultural land is not completely fixed in
quantity or quality. Irrigation, fertilizer, and conservation
techniques have increased arable land.
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19.4 Population and Economic Growth
Malthus implicitly assumed there would be no technological advance, and ignored the real possibility that improved technology, often embodied in capital, could overcome the impact of the law of diminishing returns.
The Malthusian assumption that sexual desire would necessarily lead to population increase did not take birth control techniques into account.
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19.4 Population and Economic Growth
The Malthusian assumptions are not too widely at variance with several less-developed countries today.
Some nations are having substantial population increases, with a virtually fixed supply of land and little technological advance.
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19.4 Population and Economic Growth
Population growth has a negative impact on per capita output in this case, since the added output derived from having more workers on the land is very small.
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19.4 Population and Economic Growth
In short, for some places in the modern world, the Malthusian model may be relevant.
It is scarcely surprising that population control is considered to be critical in many less-developed countries.
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19.4 Population and Economic Growth
The implementation of birth control has been far from routine.
While greater population may lower per capita output, other things equal, from the perspective of an individual family, the production of children means greater security in old age, more labor for the farm now, etc.