1、183CHAPTER 22Long-Run Economic Growth: Sources and Policies1. Chapter Summary2. Learning Objectives3. Chapter OutlineTeaching Tips/Topics for Discussion4. Solved Problems5. Solutions to Review Questions and Problems and Applications1. Chapter Summary Real GDP per capita is the best measure of a coun
2、trys standard of living because GDP measures a countrys total income. Economic growth occurs when real GDP per capita increases, thereby increasing the countrys standard of living. It is essential to understand how economic growth is defined and calculated. One can use the economic growth model to e
3、xplain 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 c
4、apital 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
5、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
6、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
7、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
8、 technological change is influenced by economic 184 Chapter 10incentives, 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 product
9、s 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 slo
10、wed 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 Eu
11、rope 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 o
12、f 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 n
13、ot 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
14、 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 questi
15、on that cannot be settled by economic analysis.2. Learning ObjectivesStudents should be able to: 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
16、 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.Long-Run Economic Growth: Sources and Policies 1853. Chapter OutlineThe Chinese Economic Mirac
17、le1. The Chinese economy has experienced high economic growth after Dengs 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 Chinas economic miracle can continue without political libera
18、lization remains to be seen.Teaching tips: At the end of this chapter, An Inside Look describes the recent increase in economic growth in India. Foreign investors have taken a growing interest in India, whose economic growth depends in large part on technological innovations. In the past decade, the
19、 Indian government has moved its economy closer to market capitalism by reducing private-sector subsidies for the purchase of capital, embraced foreign investment, and welcomed globalization. These readings can be used as the basis for classroom discussion, homework assignments or examination questi
20、ons regarding the significance of governmental policies and reforms in promoting higher economic growth and higher standard of living.Economic Growth Over Time and Around the World1. The Industrial Revolution, the application of mechanical power to the production of goods, beginning in England aroun
21、d 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 rais
22、e living standards.In the long run, small differences in economic growth rates result in big differences in living standards.Teaching tips: It will be useful for students to go through numerical examples in order to understand how growth rates are computed. One needs to reinforce this through classr
23、oom discussion, use of numerical examples, and homework assignments. Use Making the Connection 10-1 to explain why the Industrial Revolution occurred in England. Connection 10-1 summarizes research findings published by the Nobel Prize winner in Economics Douglas North who argues that institutions i
24、n England differed significantly from those in other countries in ways that greatly aided economic growth. One possible explanation for Norths argument is that in 1770 the efficiency of markets in England was significantly greater than the efficiency of markets elsewhere in Europe and in China. Use
25、Making the Connection 10-2 to show how countries like Japan that started experiencing high growth rates earlier compared to other countries like China, enjoy higher standards of living today.186 Chapter 10Dont Let This Happen To You! emphasizes the difference between the average annual percentage ch
26、ange and the total percentage change. Assign problem 2 of the Problems and Applications section at the end of the chapter to reinforce students understanding of these topics.What Determines How Fast Economies Grow?1. One should develop an economic growth model in order to be able to explain changes
27、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 service
28、s 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 w
29、ith 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 mea
30、ns of organizing and managing production.C. An economy will have a higher standard of living the more capital it has per hour worked, the better the capital, the more human capital workers have, and the better job business managers do in organizing production.D. The economic growth model can be illu
31、strated by using the per-worker production function, the relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant.E. Increases in the quantity of capital per hour worked result in movements up the per-worker production function.
32、Equal increases in the amount of capital per hour worked lead to diminishing increases in output per hour worked; the addition of one more unit of one input to a fixed quantity of another input makes output increase by smaller additional amounts.F. Technological change shifts up the production funct
33、ion and allows more output per hour worked with the same amount of capital per hour worked. In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change.G. Endogenous growth theory, developed by Paul Romer, provides a model of lon
34、g-run economic growth that emphasizes that technological change is influenced by economic incentives, and so is determined by the working of the market system.Long-Run Economic Growth: Sources and Policies 187I. Romer argues that the accumulation of knowledge capital is a key determinant of economic
35、 growth.II. The use of physical capital, such as a computer, is rival because if one firm uses it other firms cannot, and excludable because the firm that owns the capital can keep other firms form using it.H. Government policy can help increase the accumulation of knowledge capital in three ways:I.
36、 Protecting intellectual property with patents and copyrights. A patent gives a firm the exclusive right to a new product for a period of 20 years form the date the product was invented.II. Subsidizing research and development.III. Subsidizing education.I. Endogenous growth theory has revived intere
37、st in the ideas of Joseph Schumpeter and his creative destruction theory.Teaching tips: It is essential that students have an understanding of what affects economic growth. Use Making the Connection 10-3 to show how one can use the economic growth model to explain the economic collapse of the Soviet
38、 Union. Ask students: “Why Did the Soviet Unions Economy Fail?” The Soviet Union did experience some technological change, but at a rate much slower than in the United States and other industrial countries. The people in charge of running most businesses in the Soviet Unions centrally planned econom
39、y were government employees and not entrepreneurs. Assign Solved Problem 10-1 and problems 5 and 6 of the Problems and Applications section at the end of the chapter to reinforce students understanding of these topics.Economic Growth in the United States1. The economic growth model can help us under
40、stand the record of growth in the United States and discuss fluctuations in productivity growth in the United States. A. 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. Economist
41、s continue to debate the reasons for the growth slowdown of the mid-1970s to mid-1990s. Leading explanations for the productivity slowdown are I. Measurement problemsII. High oil prices, and III. A decline in labor quality. B. Because Western Europe and Japan experienced a productivity slowdown at t
42、he same time as the United States, explanations that focus on factors affecting only the United States are unlikely to be correct. 188 Chapter 10C. Some economists argue that the faster growth in productivity beginning in the mid-1990s reflects the development of a “New Economy” based on information
43、 technology.I. Information technology industries, such as computers, semiconductors, cell phones, computer programming, and computer software, have accounted for as much as one-third of the growth in real GDP in recent years.II. In 1997, real GDP grew by 4.5 percent. Of that increase, 1.5 percentage
44、 points was due to information technology industries.III. Productivity growth as measured by the average annual growth rate of labor productivity was more rapid in the United States than in the other leading industrial countries during the years between 1996 and 2004. Many economists believe there a
45、re two main explanations:i. The greater flexibility of U.S. labor markets.ii. The greater efficiency of the U.S. financial system.Teaching tips: A very good application of the economic growth model is to apply it in the United States in order to discuss fluctuations in productivity growth. Students
46、can better understand the record of growth in the United States by applying the economic growth model. Use figures 10-5 through 10-7 to explain the situation in the U.S.Why Isnt the Whole World Rich?1. It is essential to discuss why many poor countries have not experienced rapid economic growth.A. T
47、he economic growth model predicts that poor countries will grow faster than rich countries, resulting in catch-up. I. Catch-up is the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.II. According to the economic growth mode
48、l, countries that start with lower levels of GDP per capita should grow faster than countries that start with higher levels of GDP per capita.III. There has been catch-up among industrial countries.IV. Looking worldwide, catch-up is not shown as predicted by the economic growth model.B. Some poor co
49、untries do not experience rapid growth for four main reasons: I. Failure to enforce the rule of lawa. Rule of law refers to the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.II. Wars and revolutionsIII. Poor public education and healthIV. Low rates of saving and investment. C. Globalization has aided countries that have opened their economies to foreign trade and investment.Long-Run Economic Growth: Sources and Policies 189I. Foreign direct investme
