In-Depth Notes on Long-run Economic Growth: Sources and Policies

Long-run Economic Growth: Sources and Policies

Global Trends in Economic Growth

  • Economic growth has varied significantly across regions and time periods.
    • Before the Industrial Revolution, global economic growth was essentially zero.
    • From 1300 to 1800, the average growth rate was only 0.2% per year.
    • The Industrial Revolution (mid to late 1700s in Britain) marked the beginning of sustained growth in real GDP per capita.

Economic Growth Model

  • Provides insights into why different countries experience varying economic growth rates.
  • Key Definitions:
    • Long-run Economic Growth: Changes in real GDP per capita over time.
    • Labour Productivity: Output produced per hour worked.
    • Technological Change: Improvement in the ability to produce output using existing inputs.
    • Human Capital: Skills and knowledge acquired through education and experience.

Importance of Growth Rates

  • Small differences in growth rates can compound significantly over time (Refer to the 'rule of 70').
  • Countries growing too slowly may face poverty, starvation, and lack of essential services like healthcare and education.

Sources of Technological Change

  1. Improved Machinery and Equipment
  2. Increases in Human Capital
  3. Better Organizational Management

Per-worker Production Function

  • Illustrates the relationship between output per hour worked and capital per hour worked, keeping technology constant.
  • An example shows the diminishing returns of output with increasing capital per worker:
    • Increasing capital from $20,000 to $30,000 raises output from $200 to $350, but from $30,000 to $40,000 only raises it from $350 to $475.

The Role of Technological Change in Growth

  • Technological advancements mitigate diminishing returns to capital.
  • Shifts the per-worker production function upward, resulting in higher output without increasing capital investments.

Economic Catch-up and Growth Disparities

  • Catch-up Theory: Suggests poorer countries should grow faster than richer ones, as they adopt existing technologies.
  • However, not all lower-income countries have achieved rapid growth due to several factors:
    1. Lack of Rule of Law
    2. Wars and Conflicts
    3. Insufficient Public Education and Health
    4. Slow Technological Development
    5. Low Savings and Investment Rates

The Role of Globalization

  • Globalization allows poorer countries to escape cycles of low saving and investment through:
    • Foreign Direct Investment (FDI): Ownership and control of assets in a foreign country.
    • Foreign Portfolio Investment: Buying financial securities from another country.
  • Open economies experienced faster growth than those that were less open to trade and investment in the 1990s.

Evaluating Economic Growth

  • Economic growth has led to improved living standards, but it also comes with criticisms:
    • Cultural homogenization due to globalization.
    • Exploitation of low-wage workers and inadequate regulations in developing countries.
    • Environmental concerns related to growth, such as global warming and deforestation.
  • Sustainable economic growth is now a priority for policy-making in both high-income and rapidly developing countries such as China and India.