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Chapter 7 (Lecture Notes and Textbook Notes)

Tuesday, February 28, 2023
Birdget O’Shaughnessy
ECON 1BB3 C02

Lecture Notes (Tuesday, February 28, 2023)

 Saw major economic growth throughout the Industrial Revolution
 Real GDP per capita has been increasing
 Policies to increase growth that the govt can implement
 Different barriers to growth
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Textbook Notes (pg 173 – 213)

7.1 Economic Growth Over Time and Around the World
 Growing economy produces increasing quantities of goods/services and better goods/services

Economic growth from 1,000,000 BCE to present

 Most lived off bare minimum and life expectancy ↓
 Sustained economic growth began w Industrial Revolution
 Sustained increases in real GDP per capita raising living standards to high levels

Small differences in growth rates are important

 Compounding magnifies small differences in interest rates over long periods of time
 *In long run, small differences in economic growth rates result in big differences in living
standards

Why do growth rates matter

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 Economy that grows too slowly fails to raise living standards

 Don’t improve citizen lives

"The rich get richer and…"

 Groups of world's economies
1. High-income countries/industrial countries/developed countries
2. Lower-income countries/developing countries
 Newly industrializing countries had recent high rates of growth

7.2 What Determines how Fast the Economies Grow?

 Economic growth model = explains growth rates in real GDP/capita over long run
 Labour productivity = quantity of goods/services that can be produced by 1 worker or 1 hr of
work
 Believe two factors determine labour productivity
1. Quantity of capital available to workers
2. Level of tech
 Technological change = change in quantity of output firms can produce using given quantity of
inputs
 Sources of change
1. Better machine and equipment
2. Increases in human capital
3. Better means of organizing and managing production
 Country’s standard of living higher the more capital workers have available on jobs, the better
capital, the more human capital workers have, and the better job managers do in organizing
production

Per-worker production function

 Relationship b/t real GDP/hr worked and capital/hr worked, holding level of tech constant

 Assume that as move along production function, level of tech remains constant
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 Illustrate tech change using graph by shifting up curve representing production function
 High levels of capital/hr worked, further increases in capital/hr worked not result in increase in
real GDP/hr worked
 Results from the law of diminishing returns

Which is more important for economic growth: more capital or technological change?
 Technological change helps economies avoid diminishing returns to capital
 Reorganizing how production takes place to ↑ output also example of technological change

Technological change: key to sustaining economic growth

 Shifts up production function and allows economy to produce more real GDP/hr worked w same
quantity of capital/hr worked
 In long run, country experience increasing standard of living only if experiences continuing
technological change

New growth theory

 Model of long-run economic growth that emphasizes that technological change influenced by
economic incentives and so determined by working of market system
 Govt policy help increase accumulation of knowledge capital
1. Protecting intellectual property w patent and copyrights
 Ex - patents
2. Supporting research and development
3. Subsidizing education

7.3 Economic Growth in Canada

 Changes in tech throughout history have allowed Canada's economy to grow
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Is Canada headed for long period of slow growth?

 Optimistic view.
 Although productivity become more difficult to measure, Canada likely to experience
high rates of productivity growth in long run, increasing standard of living of average
person
 Pessimistic view.
 Believe productivity growth entered long-run decline in mid-1970s that was overcome
by initial effects of revolution in info tech
 Future productivity growth rates remain low and standard of living increase slowly

"Secular stagnation"
 Believe demand for loanable funds low in coming years
1. Slowing population growth reduce demand for housing
2. Modern info tech firms require less capital than older industrial firms
3. Price of capital falling relative to prices of other goods
 Firms can meet needs for capital w lower levels of expenditure

7.4 Why Isn't the Whole World Rich?

 Economic growth model provide good blueprint for developing countries to become rich
1. Increase quantity of capital/hr worked
2. Use best available tech
 Economic growth model predicts poor countries grow faster than rich countries
 Catch-up/convergence = predication that level of GDP/capita in poor countries grow
faster than rich countries
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Flexibility of US labour market

 Govt regulations less restrictive, easier to find job, and change jobs frequently
 Ensures better match b/t skills and preferences and characteristics of jobs, which
increases labour productivity
 Enter labour force earlier, retire later, and experience fewer long spells of unemployment
 Unemployed workers receive smaller govt payments for shorter period
 Design of US unemployment insurance program contributed to greater flexibility of US
labour markets and higher rates of growth in labour productivity and real GDP per
capita

Efficiency of US financial system

 Level of legal protection of investors high in US financial markets, encouraging US and foreign
investors to buy stocks and bonds issued by US firms
 Volume of trading in US financial markets ensures investors able to quickly sell stocks
and bonds t
 Liquidity attracts investors to US markets
 Tech startups obtain funds from venture capital firm

Why don’t more low-income countries experience rapid growth

1. Failure to enforce the rule of law
 Rule of law = ability of govt to enforce laws of country, w respect to protecting private
property and enforcing contracts
 For entrepreneurs to succeed govt must guarantee private property rights and enforce
contracts
 Court system developing and corrupt
2. Wars and revolutions
3. Poor public education and health
 Sick people work less and less productive
 Poor nutrition/exposure to diseases in childhood leave people weakened and affect
intelligence
4. Low rates of saving and investment

Benefits of globalization
 Foreign direct investment (FDI) = purchase/building by corporation of facility in foreign country
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 Foreign portfolio investment = purchase by induvial/firm of stocks/bonds issued in another

country
 Globalization = process of countries becoming more open to foreign trade/investment
 Developing countries that are more globalized have grown faster
 Made easier for developing countries to obtain tech and investment funds

7.5 Growth Policies

Enhancing property rights and rule of law
 Rule of law and property rights can be undermined by govt corruption
 Increased political stability prerequisite to economic growth

Improving health and education

 Poor health major impediment to growth in some countries
 Brain drain = highly educated and successful individuals leaving developing countries for high-
income countries

Policies that promote technological change

 Easiest way to gain access to tech through foreign direct investment
 Govt policies can aid growth of tech by subsidizing research and development

Policies that promote saving and investment

 Policies that increase incentives to save and invest increase equilibrium level and increase level
of real GDP/capita
 Investment tax credits allow firms to deduct from taxes fraction of funds spent on investment

Is economic growth good or bad?

 Arguments against economic growth reflect concern about environmental concern or concern
about effects of globalization process
 Some believe multinational firms behave unethically in low-income countries and exploit
countries

Conclusion
 Keys to higher living standards seem straightforward
1. Establish rule of law
2. Provide basic education and health care
3. Increase amount of capital/hr worked
4. Adopt best tech
5. Participate in global economy