Macro & Micro economics,
• Develop an essay on the following Module
o Economic Growth: Why is this important? How is it measured? What can be done to facilitate it? How is our economy doing with regard to it? How are other economies doing? Who is growing the most rapidly at the moment?
• This week’s Chapter Powerpoint Presentation, which is also available at the “MyEconLab” link, are being placed here for easy access.
o View the following Powerpoint Presentation
Long-Run Economic Growth: Sources and Policies
• Define economic growth, calculate economic growth rates, and describe trends in economic growth.
• Use the economic growth model to explain why growth rates differ across countries.
• Discuss fluctuations in productivity growth in the United States.
• Explain economic catch-up, and discuss why many poor countries have not experienced rapid economic growth.
• Discuss government policies that foster economic growth.
2. Chapter Summary
Real GDP per capita is the best measure of a country’s standard of living because GDP measures a country’s total income. Economic growth occurs when real GDP per capita increases, thereby increasing the country’s standard of living. It is essential to understand how economic growth is defined and calculated.
One can use the economic growth model to explain why growth rates differ across countries. Labor productivity is the quantity of goods and services that can be produced by one worker or by one hour of work. Economic growth depends on increases in labor productivity. Labor productivity will increase if there is an increase in the amount of capital available to each worker or if there is an improvement in technology. There are three main sources of improvements in technology: better machinery and equipment, increases in human capital, and better means of organizing and managing production.
One can say that 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 organizing production. The per-worker production function shows the relationship between capital per hour worked and output per hour worked, holding technology constant. Diminishing returns to capital mean that increases in the quantity of capital per hour worked will result in diminishing increases 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 stresses 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 emphasizes that technological change is influenced by economic incentives, and so is endogenous, or determined by the working of the market system. To Joseph Schumpeter, the entrepreneur is central to the “creative destruction” by which the standard of living increases as qualitatively better products replace existing products.
The economic growth model can help us understand the record of growth in the United States and discuss fluctuations in productivity growth in the United States. Productivity in the United States 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 debate the reasons for the growth slowdown of the mid-1970s to mid-1990s. Leading explanations for the productivity slowdown are measurement problems, high oil prices, and a decline in labor quality. Because Western Europe and Japan experienced a productivity slowdown at the same time as the United States, explanations that focus on factors affecting only the United States are unlikely to be correct. Some economists argue that the faster growth in productivity beginning in the mid-1990s reflects the development of a “New Economy” based on information technology.
In addition, 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. Some poor countries do not experience rapid growth for four main reasons: wars and revolutions, poor public education and health, failure to enforce the rule of law, and low rates of saving and investment. Globalization has aided countries that have opened their economies to foreign trade and investment.
Lastly, governments can attempt to increase economic growth through policies that enhance property rights and the rule of law, improve health and education, subsidize research and development, and provide incentives for savings and investment. Whether continued economic growth is desirable or not is a normative question that cannot be settled by economic analysis.
3. Chapter Outline
The Chinese Economic Miracle
The Chinese economy has experienced high economic growth after Deng’s reforms. At the heart of Chinese economic growth are the entrepreneurs who were set free by the economic reforms to fulfill their role in the market system. Whether China’s economic miracle can continue without political liberalization remains to be seen.
Economic Growth Over Time and Around the World
1. The Industrial Revolution, the application of mechanical power to the production of goods, beginning in England around 1750, led the world to experience significant economic growth.
A. The Industrial Revolution made possible the sustained increases in real GDP per capita that have allowed some countries to attain a high standard of living.
B. Growth rates matter because an economy that grows too slowly fails to raise living standards. In the long run, small differences in economic growth rates result in big differences in living standards.
What Determines How Fast Economies Grow?
1. One should develop an economic growth model in order to be able to explain changes in economic growth rates over time within countries and differences in growth rate among countries.
A. Economic growth model is a model that explains changes in real GDP per capita in the long run. It focuses on the causes of long-run increases in labor productivity, the quantity of goods and services that can be produced by one worker or by one hour of work.
B. Economists believe that two key factors determine labor productivity:
I. The quantity of capital per hour worked.
II. The level of technology. Technological change is the change in the ability of a firm to produce a given level of output with a given quantity of inputs. There are three main sources of technological change:
i. Better machinery and equipment.
ii. Increases in human capital. Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences.
iii. Better means of organizing and managing production.