economic growth · 2017-12-22 · economic growth slide 19 rule of 70 fv = pv (1+r)t where fv =...
TRANSCRIPT
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Learning Objectives
1. Show how small differences in growth rates
lead to large differences in living standards
2. Explain why GDP per capita is average labor
productivity times the proportion of the
population employed
Use this to discuss the sources of growth
3. Discuss the determinants of average labor
productivity - analyze differences in GDP per
capita across countries
Eco
no
mic
Gro
wth
Slide
2
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Learning Objectives…continued
4. Compare and contrast the benefits and costs
of economic growth
5. Discuss and evaluate government policies
that promote growth
6. Understand the trade-offs between economic
growth and environmental quality
Eco
no
mic
Gro
wth
Slide
3
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Introduction
Which would you rather be?
An ordinary, middleclass American living today
The richest person in America at the time of George
Washington
For most of civilized human history people
have lived a bare subsistence mostly out of
agriculture. Large cities grew and so did
imperial powers but most of the population
lived at best at subsistence with malnutrition
and disease
UNTIL….
Eco
no
mic
Gro
wth
Slide
4
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Introduction
About 300 years ago … a fundamental
change occurred
Technological advances and entrepreneurial
innovations ushered in a new era of sustained (long
run) economic growth, changing every aspect of
how we live…
According to many economists: Long run
economic growth and the ensuing increase in
living standards – why it occurs and how to
achieve it – is by far the most important issue in
Macroeconomics.
Eco
no
mic
Gro
wth
Slide
5
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Angus Maddison was a British economist
specializing in quantitative macroeconomic
history, including the measurement and
analysis of economic growth and
development.
www.theworldeconomy.org
http://www.ggdc.net/maddison/oriindex.htm
Eco
no
mic
Gro
wth
Slide
6
How Much Have We Grown?
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
From the year 1000 to 1820 AD the
advancement in per capita income was a
slow crawl — the world average rose about 50
per cent. Most of the growth went to
accommodate a fourfold increase in
population.
Since 1820, world development has been
much more dynamic. Per capita income rose
more than eightfold, population more than
fivefold.
Eco
no
mic
Gro
wth
Slide
7
How Much Have We Grown?
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Hans Rosling is a Swedish medical doctor,
academic, statistician and public speaker.
BBC video at
https://www.youtube.com/watch?v=jbkSRLYSo
jo
Global GDP growth prospects - Economist
http://www.economist.com/blogs/graphicdet
ail/2015/01/daily-chart
Eco
no
mic
Gro
wth
Slide
9
How Much Have We Grown?
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Real GDP per Person in Five
Industrialized Countries, 1870 - 2003E
co
no
mic
Gro
wth
Slide
10
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Eco
no
mic
Gro
wth
Slide
11
Real Per Capita GDP 1870 - 2003
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Observations…
The US was already a relatively wealthy
industrialized country in 1870
US real per capita GDP grew 12 times
between 1870 and 2003. In Japan, real per
capita GDP grew 28 times over the same
period 1870 – 2003
Significant part of the growth is post 1950
especially in Japan and post 1979 in China
Caution: Older data are not as reliable and is
not strictly comparable to newer data (how
does a Jet compare with a stagecoach?)
Eco
no
mic
Gro
wth
Slide
12
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Observations…continued
Small differences in Growth rates matter
Brazil was richer than Japan in 1870.
However, over the period 1870 – 2003, Japan
had the highest growth rate of 2.6% and
Brazil’s was 1.6%
This 1% differential was enough to make
Japan’s real per capita GDP be more than 3
times as large as Brazil’s in 2003.
Eco
no
mic
Gro
wth
Slide
13
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Eco
no
mic
Gro
wth
Slide
14
Real Per Capita GDP Growth Rates
1870 – 2003
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Power of Compounding
An Indian Emperor was so excited about the game of chess that he offered the inventor of the game one wish. The inventor replied that he wanted one grain of rice on the first square of the chess board, two grains on the second square, four on the third and so on through the 64th square. The Emperor readily agreed to this simple request.
The 64th square would hold 18 million trillion grains of rice - more than enough to cover the entire surface of the earth. The embarrassed Emperor had the inventor beheaded.
Eco
no
mic
Gro
wth
Slide
15
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Why “Small” Differences in Growth
Rates Concept of Compound Interest: N=P(1+r)t
How much will an Investment (N) of $10 in year 1800 @ 4% interest
be worth in year 2005?
In 1801, N = $10.40 = $10 x (1.04)
In 1802, N = $10.40 x (1.04) = $10 x (1.04)2 = $10.82
In 2005, N = $10 x (1.04)205 = $31,033.77
If the starting year is year 1, then the value of N in Year t+1 will
be: $10 x (1+r)t
Eco
no
mic
Gro
wth
Slide
16
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Power of Compounding
How much would an initial Investment (N) of
$10 in year 1800 @ 2% compound interest be
worth in year 2005?
In 2005, N = $10 x (1.02)205 = $579.48
@ 4% simple interest ? N = P(1+rt)
In 2005, N = $10 (1+ (205 x 0.04)) = $92.00
@ 4% compound interest? 10(1+ .04)205 =
31,033
@ 6% compound interest? N = $10 x (1.06)205 =
$1,540,644.29
Eco
no
mic
Gro
wth
Slide
17
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Why “Small” Differences in Growth
Rates Matter Concept of Compound Interest
The payment of interest is not just on the original deposit but also on all previously accumulated interest
Economic growth rates are similar to compound interest rates.
Government policies that affect the long-term growth rate by a small amount will have a major economic impact.
Eco
no
mic
Gro
wth
Slide
18
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Economic Growth Slide 19
Rule of 70
FV = PV (1+r)t
Where FV = future value in t+1 years of a present value PV at r% rate of interest.
Doubling implies FV = 2PV.
So 2 = (1+r)t Taking natural logs on both sides we get: ln2 = t ln(1+r)
Assuming r is small, ln(1+r) by Taylor’s expansion is approximately equal to r and ln2=0.693.
So t is approximately equal to = 69.3/r%
Why 72? Because it has more factors.
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Rule of 70
How long does it take for per capita real GDP
to double itself?
where n = number of years it takes for the
variable to double itself. Some economists
use 69, 69.3 or 70; works for small and
moderate growth rates that are positive.
US took 72/1.9 = 38 years to double per capita
real GDP.
Eco
no
mic
Gro
wth
Slide
20
RateGrowth Annual
72 n
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Determinants of Economic Growth: The
Crucial Role of Average Labor Productivity
We know that economic growth rates are
measured by annual percentage change in
Per capital Real GDP.
Y=Real GDP; N=employed; POP = Total population
Per capita real GDP is (Y/POP) is the product of average labor
productivity (Y/N) and share of population employed (N/POP);
Eco
no
mic
Gro
wth
Slide
21
POP
Nx
N
Y
POP
Y
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Understanding Growth
GDP per capita increases when
Output per worker (Y / N) increases OR
The share of the population employed (N / POP) increases
Between 1960 and 2007,
GDP per capita increased 172%
Output per worker increased 110%
The share of the population employed increased from 36% to 48%
Eco
no
mic
Gro
wth
Slide
22
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Real GDP per Person and Average
Labor Productivity in the U.S., 1960 - 2006E
co
no
mic
Gro
wth
Slide
23
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Share of the U.S. Population
Employed, 1960 - 2006E
co
no
mic
Gro
wth
Slide
24
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Understanding Growth
Share of population employed (N/POP) rose
from 36% to 48% of the entire population.
Why?
increase in labor force participation of women
the share of working age population (age 16 – 65) in total population
rose (coming of age of baby boomers and immigration).
Rise in N/POP is expected to slow down. Why?
female LFPR has stabilized
baby boomers will enter retirement around 2010
So hopes are on average labor productivity
(Y/N)
Eco
no
mic
Gro
wth
Slide
25
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Understanding Growth: The Crucial
Role of Average Labor ProductivityE
co
no
mic
Gro
wth
Slide
26
In the long run,
increases in output per person
arise primarily from
increases in average labor productivity
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Determinants of Average
Labor Productivity
High labor productivity is not determined only by the willingness of the population to work hard.
The determinants of Average Labor Productivity are: 1. Human Capital
2. Physical Capital
3. Land and Other Natural Resources
4. Technology
5. Entrepreneurship and Management
6. Political and Legal Environment
Eco
no
mic
Gro
wth
Slide
27
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
1. Human Capital and
Average Labor
Productivity Human Capital
The talents, education, training, and skills of workers raise productivity
Human capital is a the result of a combination
of factors such as education, training,
experience, intelligence, trustworthiness,
initiative, etc.
Eco
no
mic
Gro
wth
Slide
28
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Human Capital
Jack and Jill wrap chocolate candies on the assembly line. Jack
(a novice) can wrap 100/hour while Jill (who has received on-the-job-training) can wrap 300/hr. If they each work 40 hours a
week, Jack’s weekly average labor productivity (ALP) is 4000
candies and Jill’s is 12,000. ALP for this economy is 8000 candies
per week or 200 candies per hour.
Eco
no
mic
Gro
wth
Slide
29
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Human Capital: Story of Germany
and Japan Germany and Japan were devastated during WWII.
Yet in 30 years both had rebuilt and become worldwide economic leaders. How?
Foreign (mostly US) aid helped. But most economists agree that high levels of human capital played an important role in both countries.
Germany – well educated population especially scientists and engineers; extensive apprentice system providing on-the-job-training; influx of trained labor from East Germany and Russia.
Creation of technologically sophisticated and highly productive manufacturing sector – highest standards of living in Europe by 1960
Eco
no
mic
Gro
wth
Slide
30
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Human Capital: Story of Germany
and Japan…continued Japan was practically destroyed after WWII.
The occupying US forces restructured the Japanese school system and encouraged all citizens to obtain a good education.
Even more than Germany, Japan emphasized on-the-job-training. With lifetime employment, employers invested heavily in worker training.
By 1980, Japanese manufactured goods were among the best in the world and its labor force, among the most skilled.
East Germany did not have the same experience although levels of human capital were comparable to West Germany.
Eco
no
mic
Gro
wth
Slide
31
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
2. Physical Capital and
Average Labor
Productivity Physical Capital
Worker productivity depends not only on their skills (human capital)
but on the tools/machines (physical capital) they have to work with.
An excellent surgeon needs his equipment to perform surgery
The average US worker today is backed by
about $130,000 worth of physical capital – far
more than 100 years ago and more than most
other nations in the world.
Eco
no
mic
Gro
wth
Slide
32
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Diminishing returns Example: Jack
and Jill with Machines
Candy Co buys an electric candy-wrapping machine to be operated by one worker
Any worker (trained or untrained) using the machine can wrap 500 candies/hr
Assume for simplicity that the machine can be assigned to one worker only. Who should use the machine - Jack or Jill?
Why?
Jack’s output 500/hr; Jill’s is 300/hr; total is 800/hr; average is 400/hr – doubled with introduction of machine
Eco
no
mic
Gro
wth
Slide
33
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Productivity with
Automation What would happen if a second machine is
introduced?
Each worker can now have a machine. Total output is 1000/hr;
average productivity is 500/hr.
What if a third machine is introduced?
Marginal product of the third machine is zero because there are only
two workers.
Can you see Diminishing Marginal Productivity?
Eco
no
mic
Gro
wth
Slide
34
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Two Observations on Physical Capital
and Labor Productivity
Ceteris Paribus, a greater quantity of physical capital per worker raises average/marginal labor productivity We say, labor and capital are complements in production
However, physical capital is subject to diminishing returns If labor and other inputs are held constant, then the greater the
amount of physical capital already in use, the less an additional unit of capital will add to productivity.
Eco
no
mic
Gro
wth
Slide
35
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Diminishing Returns
Diminishing returns to capital occurs if an addition
of capital with other inputs held constant
increases output by less than the previous
increment of capital
Assumption: all inputs except capital are held constant
Result: output increases at a decreasing rate
When a firm has many machines, the most
productive uses have already been filled
The increment in capital will necessarily be assigned to a
less productive use than the previous increment
Principle of Increasing Opportunity Cost – Low Hanging
Fruit Principle
Eco
no
mic
Gro
wth
Slide
36
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Diminishing Returns - GraphicallyK
rugm
an
Ma
cro
eco
nom
ics 2
ed
Slide
37
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Does more capital mean
more productivity?
Is there any empirical
evidence that greater
amounts of capital per capita
raises labor productivity?
Eco
no
mic
Gro
wth
Slide
38
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Average Labor Productivity and
Capital per Worker in 15 Countries,
1990 Eco
no
mic
Gro
wth
Slide
39
Strong +ve rel. for poorer nations;
sometimes -ve rel. for the richer nations
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
3. Natural Resources: Determinant
of Average Labor Productivity Land and Other Natural Resources
Ceteris Paribus, an abundance of valuable natural resources (fertile
land, rich mineral resources, etc) increases the productivity of workers
and hence per capita real GDP.
Examples – Middle east countries and oil deposits.
But “other things” are not equal. In the
modern world, natural resources is not a very
important factor in determining labor
productivity
Nigeria is poor although it has significant oil deposits
and South Korea is rich although it is poor in natural
resources.
Eco
no
mic
Gro
wth
Slide
40
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Natural Resources and Malthus
Historically land was important. In the 19th C countries that were rich typically had abundant supply of rich farmland and mineral deposits – Canada, US, Australia and Argentina.
English economist Thomas Malthus in his 1798 book, “An Essay on the Principle of Population”, predicted that in the long run a great majority of people were destined to live on the edge of starvation.
The MALTHUSIAN argument: Land is finite. Rising world population will reduce land per capita and hence labor productivity. Physical capital and technology improvements cannot raise productivity fast enough. Only starvation will raise death rates high enough to prevent rapid population growth from outstripping productivity growth.
Eco
no
mic
Gro
wth
Slide
41
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Was Malthus Right?
In the past - maybe.
Many historians believe that Malthus’ prediction of falling and stagnant productivity was valid for much of human history – until as recently as 1820.
Population pressure was responsible for stagnant productivity growth until the 18th C. Since then, especially 19th C and beyond, other changes - advances in technology; increases in human and physical capital, and, opening up of enormous amounts of cultivable land in the New World have prevented population growth from outstripping productivity growth.
Eco
no
mic
Gro
wth
Slide
42
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
4. Technology: Determinant of
Average Labor Productivity Today, most economists would agree that
technological advancement is the single most
important source of productivity improvement.
A new technology will expand the productivity in other sectors -
introduction of railroad increased productivity of all its clients as well.
Refrigerated transportation increased productivity of farmers by
opening up national and international markets.
Eco
no
mic
Gro
wth
Slide
43
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
4. Technology: Determinant of
Average Labor Productivity US labor productivity grew 2.8% from 1947 –
1973
Slowed to 1.4% from 1973 – 1995
Resurgence to 3% since 1995
Growth since 1995 is largely attributed to
information and communications technologies
making workers more productive
Growth seen in industries that produce these technologies and in
industries that use them
Slower growth in sectors that do not use much information and
communications technologies
Eco
no
mic
Gro
wth
Slide
44
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
1973-95 Slow Productivity Mystery
The slow growth from 1973-95 still remains a mystery.
The first micro-processor was developed in 1971 but it took 25 years or more for that revolution to become standard equipment in the business world – fax machines, desktop and laptop computers, cell phones, email, etc.
So why didn’t information technology raise productivity earlier?
Economic development does not automatically follow from breakthroughs in basic science. It takes time for new inventions to become commercially viable.
Eco
no
mic
Gro
wth
Slide
45
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
1973-95 Slow Productivity Mystery
A 100 years ago, another powerful technology
– electric power – had spread through the
economy with little impact on productivity.
It was only when the multistoried tightly
packed factory layout was transformed to a
single-storied one that the full impact of the
new technology found its expression in higher
productivity – the famous assembly line.
New technology does not yield benefits if it is
used in old ways.
Eco
no
mic
Gro
wth
Slide
46
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Wal-Mart Effect – New Way of Doing
Business After 20 years of being sluggish, rate of growth
of productivity in the US started to rise again.
Was it because of Internet Technology?
Research shows the main increase came from retailing – stores were selling more merchandise per worker.
Wal-Mart had, some time ago, implemented the use of new technology like – using computer software to track inventories, use of bar code scanners, establishing direct electronic link with suppliers. Then, other companies followed.
Eco
no
mic
Gro
wth
Slide
47
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
5. Entrepreneurship, Management
and Productivity The productivity of workers depends on the people who
decide what to produce and how to produce it – the entrepreneurs
Henry Ford and mass production
Bill Gates and standardized graphical user interface operating system
Larry Page and Sergey Brin and Google's search
Steve Jobs, Steve Wozniak, Ronald Wayne and Apple
Factors influencing entrepreneurship
Taxation, Regulation, Social Customs
Management:
Influences productivity by implementing more efficient methods of production.
Eco
no
mic
Gro
wth
Slide
48
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Entrepreneurship and Medieval China
Sung period (960 – 1270 AD) was technically sophisticated.
Inventions included
Paper, Gunpowder, Water wheels, Compass(?)
Economic stagnation followed
Social system limited entrepreneurship
Emperor retained property rights to business
Seizure possible without notice
Scientific advances alone do not ensure technical change and
growth
Eco
no
mic
Gro
wth
Slide
49
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
6. Role of Government in Determining
Labor Productivity
The Role of Government in Fostering
Productivity
Establish well-defined property rights
Who owns what and how those things can be used
Reliable recourse through courts
Maintain political stability
Promote free and open exchange of ideas
Help in building infrastructure
Eco
no
mic
Gro
wth
Slide
50
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Communism and Economic Growth
▪ Why did communism fail?
▪ Because of its poor economic record.
▪ The Soviet Union had enough Human capital; Physical
capital; Natural resources and Technology.
▪ Yet, output per person in the Soviet Union at the time
of its decline in 1991 was probably less than one-
seventh the U.S. rate
What communism did not offer: Private property rights;
Free markets; Modern legal framework.
No incentives for enterprise
Eco
no
mic
Gro
wth
Slide
51
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Costs of Economic Growth
What is the cost of Economic Growth?
It is the cost of creating new capital.
Implies giving up current consumption; save more.
Reduced leisure time, worker’s safety, and health
The cost of R & D
The cost of education and training (human capital)
Eco
no
mic
Gro
wth
Slide
52
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Economic Growth Slide 53
Promoting Economic
Growth Government support of education and training
programs
US public education support extend from kindergarten through to institutions of higher learning
Head Start program for pre-school children
Job training and retraining programs
Government pays because education has externalities
A democracy works better with educated voters
Progressive taxes capture some of the higher income
Increases the chances of technical innovation
Poor families may not be able to pay
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Govt. Promoting Eco
Growth Policies that promote saving and investment –
Individual Retirement Account (IRA),
Investment tax credit
Policies that provide and maintain basic
infrastructure - the public capital that
promotes private economic activities
Policies that support research and
development - National Science Foundation;
the Global Positioning System (GPS) was
developed originally for the military
The legal and political framework
Eco
no
mic
Gro
wth
Slide
54
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Economic Growth Slide 55
Promoting Economic Growth in
Less developed Countries
Prescription for more human and physical capital
is broadly correct
Appropriate technology and education
Most countries need institutions to support growth
Corruption creates uncertainty about property rights
and drains financial resources out of the country
Regulation discourages entrepreneurship
Taxes discourage risk-taking
Markets do not function efficiently
Lack of political stability discourages foreign investment
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Are There Limits to
Growth? Eco
no
mic
Gro
wth
Slide
56
We live in a finite world with finite resources - does that
limit economic growth?
Can growth be sustained?
Depletion of some natural resources
Environmental damage and global warming
Limits to growth, assumes economic growth will take the
form of what we have now.
Limits to growth, overlooks that growth expands society’s
capacity to safeguard the environment.
Limits to growth, underestimates the power of markets to
deal with scarcity
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Are There Limits to
Growth?
Why is the air quality so poor in Mexico City?
Middle income economies are the worst affected by the costs of growth - they are well placed to grow rapidly but not rich enough to afford to be “clean”
Eco
no
mic
Gro
wth
Slide
57
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Relationship between Air
Pollution and Real GDP per PersonE
co
no
mic
Gro
wth
Slide
58
Real GDP per person
Air
pollu
tion
A
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Krugman Macroeconomics 2ed Slide 59
Stories of Growth - Brazil
Greater natural resource and physical capital, improved
technologies with greater R&D, improved economic
policies – enabled Brazil to achieve significant economic
growth in recent times.
Exploited a natural resource – tropical savanna land called
cerrado
Technology – adding lime and phosphorous made the land
productive; developed cattle breeds and soybeans suited
to the land and climate; now working on wheat
Economic reform (encouraging exports and foreign capital
imports)
Infrastructure – still a problem.
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Slide 60
Stories of Growth – East Asian
Miracle South Korea’s economic growth is unprecedented in
history – beginning in early 1960s, the economy grew at
7% for more than 30 years.
Part of a broader phenomenon called East Asian Miracle –
South Korea, Taiwan, Hong Kong, Singapore and now
China. Since 1975 the whole region has had an economic
growth rate of 6% - 3 times America’s historical average.
HOW? Very high savings rates, excellent basic education,
and substantial technological progress.
Why now? Why not in the past? Taken advantage of the
already developed technologies of the West and Japan –
adopted them and sometimes improved upon them.
Krugman Macroeconomics 2ed
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Slide 61
Stories of Growth – Latin
America’s Disappointment In 1900 per capita real GDP in Argentina, Uruguay and
Southern Brazil were comparable to the then economically
advanced countries. Since 1920, growth has been
disappointing.
Why? Savings and investment rates have been low partly
due to irresponsible govt. policies that led to high inflation
and bank failures and eroded savings; low importance on
education; political instability.
In the 1980s many economists were of the opinion that
Latin American nations were suffering from excessive govt.
intervention. They suggested opening the economies to
imports, selling off inefficient govt. owned enterprises and
generally freeing up individual initiative. So far only Chile
has responded well to these reforms.Krugman Macroeconomics 2ed
MB MC
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved. Slide 62
Stories of Growth – Africa’s
Troubles Africa south of the Sahara - home to 780 million people is
intensely poor.
Why?
Years of political instability; war and general anarchy has
made productive investment impossible.
Property rights are not well defined; coupled with
government corruption there is no incentive to own and
improve private property.
Jeffery Sachs of Columbia University thinks Africa is
politically unstable because it is poor. And it is poor
because of unfavorable geographic conditions –
landlocked, hot, infested with tropical diseases and poor
soil. Krugman Macroeconomics 2ed