1 Economics 285 Economic Growth I.B.M. Will Invest $5 Billion To Produce Newer Microchips – NY...
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Transcript of 1 Economics 285 Economic Growth I.B.M. Will Invest $5 Billion To Produce Newer Microchips – NY...
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Economics 285Economics 285Economic
GrowthI.B.M. Will Invest $5 Billion ToProduce Newer Microchips – NY Times 10/10/2000
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Economic GrowthEconomic Growth
Long-Term Growth TrendsThe Sources of Economic GrowthGrowth AccountingGrowth TheoryAchieving Faster Growth
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Long-term growth trends are the trends in potential GDP
Long-Term Growth TrendsLong-Term Growth Trends
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A Hundred Years of Economic A Hundred Years of Economic Growth in the United StatesGrowth in the United States
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Economic Growth in CanadaEconomic Growth in CanadaFigure shows long-term growth in Canada since 1895.
Growth was fastest during the 1960s.
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Fig. 11.2(a) shows growth in the biggest economies since 1960.
Japan has caught up with the other big economies.
Long-Term Growth TrendsLong-Term Growth Trends
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Fig. 11.2(b) shows gaps in real GDP per person have been very persistent for most groups of countries.
Long-Term Growth TrendsLong-Term Growth Trends
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Fig. 11.3 shows some Asian economies closing the gap in real GDP per person.
Long-Term Growth TrendsLong-Term Growth Trends
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Economic growth occurs when incentives are created by: markets property rights monetary exchange
The Sources of Economic The Sources of Economic Growth Growth
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The activities that generate growth are: saving and investment growth of human capital discovery of new technologies
The Sources of Economic The Sources of Economic Growth Growth
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Growth accounting is the attempt to measure the contributions to growth of labor, capital, and technological change.
Real GDP growth equals the growth of real GDP per hour of work plus the growth rate of aggregate hours.
Growth AccountingGrowth Accounting
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The growth rate of real GDP per hour of work depends on: Growth of capital per hour of labor Technological change
Fig 11.4 is a time series plot of GDP per hour of work for US
Growth AccountingGrowth Accounting
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Real GDP per Hour of WorkReal GDP per Hour of Work
Fig 11.4 -- time series plot of GDP per hour of work for US
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Separates the effects of: Growth of capital per hour of labor Technological change
Hold technology constant, vary capital per hour of work
Productivity functionProductivity function
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How Productivity GrowsHow Productivity Grows
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32
25
30 60
PF0
PF0
Effect of technologicalchange
Effect ofincreasein capitalstock
Rea
l GD
P p
er h
our
of w
ork
(199
2 do
llars
)
Capital per hour of work (1992 dollars)
0
Fig. 11.5
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One-third rule. Goal: Divide the increase in real GDP per hour of work into capital effect technological
change effect
Growth AccountingGrowth Accounting
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An x percent increase in capital per hour of work brings a 1/3 of x percent increase in output per hour of work.
Growth AccountingGrowth Accounting
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The remaining increase in output per hour of work is attributed to technological change (and unidentified factors).
Growth AccountingGrowth Accounting
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Growth accounting is used to account for the productivity growth slowdown.
Figure 11.6 shows how this type of breakdown is made.
Growth AccountingGrowth Accounting
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Growth Accounting and the Growth Accounting and the Productivity Growth SlowdownProductivity Growth Slowdown
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Growth AccountingGrowth Accounting
Technological Change During the Productivity Growth Slowdown Technology was directed toward coping
with two major problems.
1) Energy price shocks
2) The environment
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Growth AccountingGrowth Accounting
Achieving Faster Growth Stimulate Saving Encourage international trade Improve the quality of education Stimulate high-technology industries? Target high-technology industries?
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The task of growth theory is to explain the trends in economic growth.
Three main theories have been proposed: Classical growth theory Neoclassical growth theory New growth theory
Growth TheoryGrowth Theory
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Classical Growth TheoryClassical Growth Theory
Real GDP growth is temporary Real GDP per person above subsistence Brings population explosion Returns real GDP per person back to the
subsistence level. Malthusian theory.
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Classical Growth TheoryClassical Growth Theory
The Basic Idea (1776) Real GDP has increased Real wage rate has increased Population growth increases labor supply Wage falls due to diminishing returns...
... to labor
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Classical Growth TheoryClassical Growth Theory
Subsistence real wage rate
Minimum needed to maintain life. If the real wage rate falls below
subsistence, some people cannot survive and population growth subsides
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LD1
Growth BeginsGrowth Begins
1
2
3
4
5
0 1 2 3 4 5 6
LS0
LD0
Labor (millions)
Rea
l wag
e ra
te (
1776
shi
lling
s pe
r da
y)New technologies andmore capital increasethe productivity of labor
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Subsistencereal wage rate
A Dismal OutcomeA Dismal Outcome
1
2
3
4
5
0 1 2 3 4 5 6
LS0 LS1
LD1
Labor (millions)
Rea
l wag
e ra
te (
1776
shi
lling
s pe
r da
y)
When the real wagerate exceeds thesubsistence level, thepopulation increases
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Modern Theory ofModern Theory ofPopulation GrowthPopulation Growth
Income levels and population growth may be inversely related Opposite of Malthus Income death rate falls Income birth rate falls
Relationship is weak
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Neoclassical Growth TheoryNeoclassical Growth Theory
Technological change
Induces saving and investment
Makes capital per person grow
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Neoclassical Growth TheoryNeoclassical Growth Theory
The Basic Idea Technological advances promise new profit
opportunities ID increases, real interest rate rises Saving increases K stock grows Real GDP and YD grow
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Neoclassical Growth TheoryNeoclassical Growth Theory
The Basic Idea (cont.) Prosperity will persist Growth will stop if technology stops
advancing:• profit leads to K accumulation• diminishing returns to capital
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Neoclassical Growth TheoryNeoclassical Growth Theory
Target Rate and Long-Run Saving When real interest rate exceeds the target
rate, the K stock increases When the target rate exceeds real interest
rate, the K stock decreases When real interest rate = the target rate,
the K stock is constant
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Neoclassical Growth TheoryNeoclassical Growth Theory
Target Rate and Long-Run Saving (cont.) Technology advances, real GDP grows but
the growth rate diminishes New advances increase the demand for
capital, raising the real interest rate and inducing saving
Rate of technological progress is unpredictable
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Neoclassical Growth TheoryNeoclassical Growth Theory
Target Rate and Long-Run Saving (cont.) The process repeats as long as technology
advances, creating an on-going process of long-term economic growth.
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Neoclassical Growth TheoryNeoclassical Growth Theory
A contradicted hypothesis? Technology and capital are mobile Therefore growth rates and per-capita
income levels converge Data reveal that convergence is slow or
absent
Why?
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ID1
Neoclassical Growth BeginsNeoclassical Growth Begins
Savings and investment (trillions of 1992 dollars)
Rea
l int
eres
t rat
e (p
erce
nt p
er y
ear)
2
4
6
8
0 0.5 1.0 1.5 2.0 2.5
SS0
ID0
10
Technologicaladvances increaseinvestment demand...
…real interestrate, saving, andinvestment increase
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KD1
KS1
Neoclassical Growth EndsNeoclassical Growth Ends
2
4
6
8
0 5 10 15 20 25
KS0
KD0
10
Capital stock (trillions of 1992 dollars)
Rea
l int
eres
t rat
e (p
erce
nt p
er y
ear)
LKSa b
When the real interestrate exceeds the target rate, saving and investment increase thesupply of capital.
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New Growth TheoryNew Growth Theory
Holds that real GDP per person grows because of the choices that people make in the pursuit of profit and that growth can persist indefinitely.
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New Growth TheoryNew Growth Theory
New growth theory begins with two facts about market economies:
1) Discoveries result from choices.
2) Discoveries bring profit, and competition destroys profit.
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New Growth TheoryNew Growth Theory
Discoveries and Choices The pace of discoveries is not determined
by chance. It depends on how many people are
looking for a new technology and how intensively they are looking.
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New Growth TheoryNew Growth Theory
Two other facts are key to new growth theory:
1) Discoveries can be used by many people at the same time.
2) Physical activities can be replicated.