economic growth the “three pillars” of growth growth-encouraging policies u.s. growth puzzles...
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Economic Growth
• The “three pillars” of growth• Growth-encouraging policies• U.S. growth puzzles• Growth in developing countries
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The three pillars of growth
• Physical capital• Human capital
– education– training
• Technological changeHolding any two constant and increasing the
third increases productivity. Of course, all may change at the same time.
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Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Production Functions Corresponding to Three Different Capital Stocks
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Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
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Growth-encouraging policies
• Promote physical capital formation• Improve and increase education and training• Promote research and development
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Promote physical capital formation
• synonymous with investment• investment = flow of resources into the
production of new capital
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Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Choosing between Investment and Consumption
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Promote investment by:
• lowering interest rates• changes to tax laws• technological advances• higher demand• greater political stability• respect for property rights
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Improve and increase education and training
• lowering interest rates• subsidizing directly• subsidizing through lowered loan rates• technological advances in provision• incentives through higher earnings
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College-to-High School Weekly Wage Premium, 1963–2008
Sources: The College Board, Education Pays 2010, Figure 1.7a; Autor, 2010.
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Promote research and development
• lowering interest rates• subsidizing directly• invest physical capital in R&D• improve education and training• invest human capital in R&D• increase payoffs to R&D
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U.S. growth puzzles
• why did productivity slow down in 1973-90?• why has productivity sped up since 1990?
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Why did productivity slow down in 1973-90?
• Lower investment? But investment/GDP was constant
• Higher energy prices? But energy prices fell in mid-80s while productivity growth stayed low
• Low human capital? But educational attainment and quality measures continued to rise
• Technological slowdown? But continued investment, particularly in computer technology
Perhaps the question should be instead: Why was productivity growth so high from 1947-73?
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Why did productivity speed up after 1990?
• Higher investment• Falling energy prices• Improved human capital? Less clear.• Technological improvements, particularly in
information technology
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Growth in developing countries
• The three pillars revisited• The convergence hypothesis• Additional hurdles
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The three pillars revisited
• Physical capital– low capital stocks and challenges to accumulation– development assistance in form of grants and loans
• Human capital– low capital stocks and challenges to accumulation– development assistance for education system
• Technological change– low ability to develop R&D and to make use of existing
technologies– assistance: FDI investment by multinationals?
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The convergence hypothesis
• Alternatively, later developing countries should develop faster because they can use existing technologies rather than having to develop them by themselves
• Then their growth rates would be higher than in the developed countries
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Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
The Convergence Hypothesis
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Additional hurdles
• Geography• Health• Governance
– political instability– ill-defined property rights for individuals and firms