Chapter 7 Economic Growth
Chapter 7 Economic Growth
7.1: The Relatively Recent Arrival of Economic Growth
Major Themes
Prior to the last 200 years, GDP per capita was largely stagnant.
Modern economic growth refers to the rapid economic growth period starting from 1870 onward.
Inquiry into what occurred in England around 1800 that initiated this change.
Industrial Revolution
Definition
Industrial Revolution: The widespread use of power-driven machinery along with the accompanying economic and social changes that took place in the first half of the 1800s.
Impact
The Industrial Revolution ignited rapid and sustained economic growth.
The event also resulted in growing inequality among nations.
Economic Inequality Statistics
1870: The GDP per capita of the world's leading economies was 2.4 times that of the world's poorest economies.
1960: This disparity grew, with the top economies having a GDP per capita 4.2 times that of the poorest economies.
7.2: Labor Productivity and Economic Growth
Major Themes
Sustained long-term economic growth per capita is primarily derived from increases in labor productivity.
Labor Productivity Defined
Labor Productivity: Refers to the value produced per worker or per hour worked, sometimes referred to as worker productivity.
Output per Hour Worked in the U.S. Economy
Key Measure
The dollar value of output per hour worked is a commonly used measure for assessing worker productivity.
Important statistic: the average U.S. worker in 2020 produced over twice as much per hour than in the early 1970s.
7.3: Components of Economic Growth
Productivity Growth Since 1950
Trends
Labor productivity growth has varied at different rates over the past 70 years.
Implications
While changes may appear minimal, sustained trends can significantly impact economic output over time.
GDP and Compound Growth Rates
Key Insights
Small changes in growth rates, when compounded over long periods, drastically affect living standards.
Example Calculation
Initial GDP: Botswana’s GDP at $10 billion with a growth rate of 5%.
Formula Used:
Yearly Estimates Breakdown
Year | Starting GDP | 1 + Growth Rate | Year-End GDP |
|---|---|---|---|
1 | $10.00 billion | 1.05 | $10.50 billion |
2 | $10.50 billion | 1.05 | $11.03 billion |
3 | $11.03 billion | 1.05 | $11.58 billion |
4 | $11.58 billion | 1.05 | $12.16 billion |
5 | $12.16 billion | 1.05 | $12.76 billion |
The Power of Sustained Economic Growth
Comparative Growth Scenarios
The impact of growth rates demonstrated through examples:
For a growth rate of 1%:
Original Value of 100 in 10 Years: 110
Original Value of 100 in 50 Years: 164
For a growth rate of 3%:
Original Value of 100 in 10 Years: 134
Original Value of 100 in 50 Years: 438
For a growth rate of 5%:
Original Value of 100 in 10 Years: 163
Original Value of 100 in 50 Years: 1,147
For a growth rate of 8%:
Original Value of 100 in 10 Years: 216
Original Value of 100 in 50 Years: 4,690
Conclusion
Sustained economic growth is considered paramount for enhancing people's standard of living.
GDP Growth in the U.S., China, and India
Growth Rate Trends (1974-2019)
A graph depicting the GDP growth rates over the specified years for China, the USA, and India highlighting periods of growth and contraction.
7.4: Economic Convergence
Defining Economic Convergence
Convergence: Refers to the phenomenon where economies with lower per capita incomes grow at faster rates than those with higher per capita incomes.
Questions Raised
What are the expected conditions that might result in convergence among countries?
Conversely, what factors might inhibit convergence?
Historical observations on global economic convergence.
Arguments Favoring Convergence
Potential Advantages of Low-Income Countries
Low-income countries could leverage their conditions to enhance worker productivity and promote economic growth.
Diminishing Marginal Returns: These countries might experience easier increases in productivity due to starting from a lower base.
These nations can utilize existing technology innovations already developed elsewhere, sometimes referred to as “the advantages of backwardness.”
They are also at a learning advantage, having observed the growth experiences of faster-growing economies.
Arguments Against Inevitable or Likely Convergence
Impediments for Low-Income Countries
If wealthier nations can continually innovate and develop new technologies, they may outpace convergence efforts of lower-income nations.
Concerns about whether advancements in technology will experience diminishing returns.
Although anticipated not to happen soon, as innovations can often be adapted with minimal costs.
Adaptation Challenges
Societal Performance Issues
The performance of low-income countries may not be guaranteed despite opportunities to adopt new technologies.
Barriers that may inhibit effective technology application include:
Insecurity in private property rights
Lack of competitive markets
Governmental monopolistic practices or affiliations
Inadequate provision of essential services to foster growth such as infrastructure and education.
Historical Evidence of Convergence
Lack of Global Convergence Trends Prior to 2000
Analysis of the second half of the last century shows no substantial global convergence trend.
Recent Signs of Convergence
- Some economists contend that convergence patterns have become more visible over the past two decades, suggesting a shift.
Inequality Insights
Decreasing Inequality
Recent estimates indicate that global individual inequality may be declining despite stagnant cross-country inequality.
The Slowness of Convergence
Economic Dynamics
Economic convergence is possible but anticipated to be a slow process.
Historically, high-income countries have maintained considerable advantages in living standards for extended periods.
Example of Growth Over Time
High-Income Country Scenario: Current GDP per capita of $40,000, with a growth rate of 2%.
After 30 years:
Low-Income Country Scenario: Current GDP per capita of $4,000, with a growth rate of 7%.
After 30 years:
Comparison: Initially, the richer country was 10 times wealthier, and after 30 years, is approximately 2.4 times wealthier. This indicates some degree of convergence, but the poorer country will still feel much poorer compared to the richer one.