Macroeconomics: Long-Run Economic Growth
Macroeconomics: Long-Run Economic Growth
Chapter Overview
- Purpose: Examine the effect of government policies on long-term economic growth.
- Key concepts:
- Economic growth is not inevitable; historical periods show stagnation in output per capita.
- Need to understand why some countries grow faster than others.
7.1 Economic Growth Over Time and Around the World
- Historical GDP per Capita (Estimates)
- 1,000,000 B.C.E.: Approximately $150 (2021 dollars).
- C.E. 1300: GDP per capita remains approximately $150.
- Conclusion: No sustained economic growth before the Middle Ages.
7.2 Determinants of Economic Growth
The Industrial Revolution (circa 1750)
- Initiated sustained economic growth by utilizing mechanical power for production (shift from human/animal power).
- Key countries: England, the US, France, Germany.
Government Influence on Growth
- Douglass North emphasizes Britain's Glorious Revolution (1688) as crucial for establishing property rights and investor security.
Sustained Growth Rates
- Example: A growth rate increase from 1.7% to 2.3% results in significant long-term living standard differences.
- COVID-19 impacts observed with negative growth in 2020.
7.3 Economic Growth in Canada
Historical Growth Trends
- Canada experienced modest growth prior to 1900, escalated due to government investments in R&D during the 20th century.
- Notable growth period: 1950-1973, followed by a decline until the mid-1990s.
- Technical advancements attributed to renewed growth post-1995.
Future Growth Predictions
- Economists vary in outlook on productivity; some suggest current measures may underestimate true productivity.
- Factors influencing future growth: aging population, investment levels, and IT firm's capital needs.
7.4 Global Income Disparities
Economic Catch-Up Model
- Predictions suggest poorer nations grow faster than developed ones due to capital accumulation potential and technology availability.
- Observations indicate catch-up has occurred among wealthier countries but is lacking globally.
Reasons for Slow Growth in Low-Income Countries
- Rule of law enforcement failures.
- Impact of wars and civil disruptions.
- Poor public health and education systems.
- Low investment and savings rates.
7.5 Growth Policies
Government's Role in Economic Growth
- Importance of protecting property rights and rule of law.
- Improvement of health and educational systems as foundations for sustained growth.
- Encouraging technological advancement through policies supporting innovative industries.
- Promoting savings and investment through tax incentives and eliminating corruption.
Example of Schumpeter's Creative Destruction
- New technologies can disrupt existing markets, highlighting the entrepreneur's role in economic evolution.
Is Economic Growth Always Good?
- While growth improves living standards, it can also result in negative externalities (environmental impact, resource depletion).
- The debate on whether further economic growth is beneficial in high-income countries remains unresolved.
Common Misconceptions
- High growth rates do not equate to high living standards; sustained growth is required for meaningful improvements.