Chapter 7 Macroeconomics

Modern Economic Growth

The period of rapid economic growth from 1870 onward

Rapid and sustained economic growth is a relatively recent experience for human race

Before the last two centuries, the average person’s standard of living had not changed much for centuries

Industrial Revolution

The widespread use of power-driven machinery and the economic and social changes that resulted in the first half of the 1800s

The Industrial Revolution Led to Increasing Inequality Among Nations

1870: GDP of the top economies of the world was 2.4 times the GDP per capita of the world’s poorest economies

1960: The top economies had 4.2 times the GDP per capita of the world’s poorest economies

Adherence to the Rule of Law

The process of enacting laws that protect individual and entity rights to use their property as they see fit

Law must be clear, public, fair, and enforced, and applicable to all members of society

Protection of Contractual RIghts

The rights of individuals to enter into agreements with others regarding the use of their property

Providing recourse through the legal system in the event of noncompliance

Labor Productivity

The value of what is produced per worker, or per hour worked (sometimes called worker productivity)

Determinants of Worker Productivity

Human Capital

Technological Change (Invention, Innovation)

Economies of Scale

Human Capital

The accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses

Technological Change

A combination of invention and innovation

-Invention: Advances in knowledge

-Innovation: Putting advances in knowledge to use in a new product or service

Economies of Scale

The cost advantages that industries obtain due to size

Production Function

The process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use

Micro-Describes a firm’s or an industry’s inputs and outputs

Macro-The connection from inputs to outputs for the entire economy an aggregate production function

Aggregate Production Function

The process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita

Rate of Productivity Growth

Closely linked to the growth rate of its GDP per capita

Physical Capital

The plant and equipment that firms use in production; this includes infrastructure

Increase in the quantity
Increase in the quality

Infrastructure

A component of physical capital such as roads and rail systems

Technology

All the ways in which existing inputs produce more or higher quality, as well as different and altogether new products

Capital Deepening

When society increases the level of capital per person

Can apply both to additional human capital per worker and to additional physical capital per worker

Growth Accounting Studies

Economists use this to determine the extent to which physical and human capital deepening and technology have contributed to growth

Technology is typically the most important contributor to U.S. economic growth

Growth in human capital and physical capital explains only half or less of economic growth

Some Areas in Which Governments Around the World have Chosen to Incest in to Facilitate Capital Deepening and Technology

Education

Savings and investment

Infrastructure

Special Economic Zones

Scientific Research

Special Economic Zones

Area of a country, usually with access to a port where, among other benefits, the government does not tax trade

Convergence

Pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

Low-Income Countries Might have an Advantage in Achieving Greater Worker Productivity and Economic Growth in the Future Like:

Diminishing marginal returns

Low income countries may find it easier to improve their technologies than high-income countries, by applying technology that has already been invented

-Economist Alexander Gerschenkron names this “the advantages of backwardness”

Low-income countries have observed the experience of those that have grown more quickly and have learned from it

The Slowness of Convergence

A high-income country with a GDP per capita now of $40,000, with a 2% annual growth rate, after 30 years, will end up with a GDP of $72,450 (=$40,000 (1+0.02)³0)

While in a poor country with a GDP per capita now of $4,000, with a 7% annual growth rate, after 30 years, will end up with a GDP of $30,450 ($4,000 (1+0.07)³0)

Convergence has occurred

The rich country was 10 times as wealthy as the poor one, and now it is only about 2.4 times as wealthy
Even after 30 consecutive years of very rapid growth, people in the low-income country are still likely to feel quite poor compared to people in the rich country