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.