ECONOMIC GROWTH ECONOMIC GROWTH Original slides created by
ECONOMIC GROWTH
ECONOMIC GROWTH Original slides created by Daniel Forsberg ECONOMIC GROWTH Chapter #7 KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH CHAPTER 7 GOALS 1. Define Economic Growth and Economic Development 2. Observe real world outcomes which result from Economic Growth and Development 3. Identify and begin to understand the sources of Economic Growth KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Growth and Development around the World Economic Development – improvements over time in a society’s quality of life and living standards • By definition, very qualitative in nature • Includes, but is not limited to, increased consumption of and access to material goods and services Economic Growth – sustained increases over time in a society’s value of Real GDP Growth and Development are desirable for all societies (i. e. , people in all countries would prefer a higher standard of living) => but, these goals are in many ways “more urgent” in LDC’s (e. g. , India, Kenya, Nepal, etc. ) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Socioeconomic “Quality of Life” Measures When assessing Economic Development, look at GDP. . . but, also look further at things which would indicate a “higher standard of living” => GDP is clearly not the only thing that matters for “overall quality of life. ” Other factors that are reasonably important: • • Life Expectancy at birth: expected lifespan at birth, measured in years Infant Mortality Rate: number of deaths per 1, 000 live births Literacy Rate: percentage of population over age of 15 that can read and write Cellular Subscribers: number of cellular phone subscriptions per 100 people Access to Electricity: percentage of population with access to electricity in home Tertiary Education: % of adult pop. w/ completed education beyond high school Average Annual Working Time: mean hours worked per year per worker KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Socioeconomic “Quality of Life” Measures Country Japan Singapore Spain South Korea Sweden Norway Germany USA China Mexico Russia Cambodia India Afghanistan DR Congo Nigeria Life Expect. 84. 6 83. 0 82. 8 82. 4 81. 3 78. 9 76. 9 75. 1 72. 6 69. 8 69. 7 64. 8 60. 7 54. 7 Infant Literacy Cellular Access to Tertiary Avg Annual Mortality Rate Subscribers Electricity Education Work Time 0. 19 99 133. 5 100 18. 91 1, 738 0. 22 96. 8 148. 2 100 29. 71 2, 238 0. 26 98. 1 113. 2 100 14. 96 1, 687 0. 28 98. 0 124. 9 100 30. 04 2, 063 0. 23 99 125. 5 100 14. 93 1, 609 0. 21 100 107. 8 100 12. 16 1, 417 0. 31 99 129. 1 100 13. 14 1, 354 0. 57 99 122. 0 100 26. 76 1, 757 0. 80 96. 4 104. 6 100 2. 71 2, 174 1. 15 94. 5 88. 5 100 9. 81 2, 255 0. 65 100 157. 9 100 24. 74 1, 974 2. 51 78. 3 116. 0 49. 8 1. 32 2, 456 3. 20 72. 2 87. 3 84. 5 4. 85 2, 117 5. 15 38. 2 67. 4 84. 1 3. 65 no data 7. 00 77. 2 43. 4 17. 1 0. 46 no data 6. 46 59. 6 75. 9 59. 3 no data 1, 827 Figures from “Our World in Data” - https: //ourworldindata. org/ KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS GDP Per Capita (PPP) $41, 429 $97, 341 $40, 903 $42, 765 $53, 240 $63, 633 $53, 919 $62, 530 $16, 117 $19, 796 $27, 044 $4, 389 $6, 700 $2, 065 $1, 098 $5, 136
ECONOMIC GROWTH Economic Growth & GDP Growth Rate Economic Growth – sustained increases over time in a society’s value of Real GDP • illustrated by an outward shift of PPF => measured quantitatively by percentage increase in Real GDP Growth Rate – annual percentage change in the value of Real GDP • most countries typically experience moderate, positive growth in most years KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH GDP GROWTH RATES AROUND THE WORLD Country/Region 1970 -2019 1970 -79 1980 -89 1990 -99 2000 -09 2010 -19 China Botswana South Korea Myanmar India Kenya Brazil Sub-Saharan Africa World United States Zimbabwe European Union Greece Congo, Dem. Rep. 9. 03 8. 17 6. 99 6. 32 5. 47 4. 61 3. 62 3. 31 3. 10 2. 74 2. 59 2. 19 1. 83 1. 23 7. 39 15. 70 10. 52 4. 38 2. 93 7. 16 8. 47 4. 37 4. 02 3. 18 4. 13 3. 51 5. 53 0. 27 9. 74 11. 46 8. 88 1. 94 5. 69 4. 22 2. 99 1. 57 3. 03 3. 12 5. 22 2. 29 0. 78 1. 81 9. 99 5. 40 7. 30 6. 12 5. 77 2. 24 1. 88 1. 94 2. 63 3. 22 2. 91 2. 16 2. 06 – 5. 47 10. 35 3. 54 4. 92 12. 40 6. 28 3. 57 3. 39 5. 21 2. 87 1. 91 – 5. 18 1. 56 2. 77 3. 30 7. 69 4. 75 3. 31 6. 78 6. 66 5. 84 1. 39 3. 48 2. 96 2. 27 5. 89 1. 56 – 1. 97 6. 23 World Bank data KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH • Catch-up Effect – conjecture that (all other factors fixed) the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up” over time. When observing GDP growth rates (or any growth rate), recognize the effect of “growth on top of growth”… • Question: if a country were to grow at “ 9% per year, ” how long would it take for GDP to double (i. e. , increase by 100%)? • Hint: it might seem like the obvious answer is “about 11 years” (since (100/9)≈11)… but it’s actually a shorter amount of time because in future years the growth is “growth on top of growth”… • Answer: it would actually only take about 8 years for GDP to double… a more general approximation is given by the “Rule of 72”… KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Rule of 72 “Rule of 72” – a variable that grows at a constant rate of “X% period” will double in value in approximately “(72/X) periods. ” What if India could grow at 9% per year for the next 32 years (China averaged growth of 9. 03% per year from 1970 through 2019)? • GDP would double approximately every 8 years • Thus, they would experience “ 4 doublings” => growth on top of growth gives “an extra doubling” • Which would imply that GDP would be “ 2 times 2” times larger – that is, “ 16 times” larger – 32 years from now! KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Sources of Economic Growth What can lead to economic growth? • Basically, any change which moves the PPF further “from the origin”… => recall, “placement of PPF” depends upon how many resources a society has available and how productive those resources are… • To understand sources of growth, it is important to define… § Physical Capital – machines, buildings, factories, and other equipment used in the production process § Human Capital – the knowledge, education, skills, experience, work ethic, inter-personal skills, and other attributes of workers which determine productivity § Technology – the application of scientific and engineering principles to the problem of production KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Sources of Economic Growth Four broad sources of economic growth (i. e. , changes that would lead to an “outward movement of PPF over time”). . . 1. Increases in the quantity of labor (i. e. , more workers) 2. Increases in the quantity of physical capital (i. e. , more factories, trucks, computers, electricity plants) 3. Improvements in the quality of labor (i. e. , workers becoming more highly educated/skilled) 4. Improvements in technology Recognize the parallel between “sources 2, 3, and 4” and the previous definition of IAC’s. . . Industrially Advanced Countries (IAC’s) – high income countries with primarily market based economies, large stocks of technologically advanced industrial capital, and a highly educated and skilled workforce (e. g. , U. S. , Norway, Australia, Germany, Japan) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Ways to Achieve Economic Growth 1. Deliberate investments in human capital and physical capital (either by individuals or society) • when a society devotes more resources to producing capital goods today, they will have more capital goods available in the future (but, at the expense of having fewer consumer goods in the present period) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Ways to Achieve Economic Growth 2. Deliberate investments by society in overhead capital • overhead capital – basic infrastructure such as railways, roads, telecommunications networks, electricity supply systems, and water supply systems 3. Realize improvements in technology (i. e. , technical change) which fundamentally alter the type of capital available or the production process • the bulk of economic growth in recent decades and centuries has resulted from improvements in technology (e. g. , Industrial Revolution) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Impediments to Achieving Growth 1. Difficulties in developing physical capital • Vicious-cycle-of-poverty hypothesis – conjecture that poor countries will remain poor since they do not have sufficient resources available to make the investments in capital which are necessary for economic growth § has some merit, but clearly not always true (if it were, no nation would ever develop) § in reality, scarcity of financial capital in many poor countries is caused by a lack of incentives for saving/investment within the country KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Impediments to Achieving Growth 1. Difficulties in developing physical capital (continued) • Capital flight – tendency for wealthy people in poor countries to invest their financial capital abroad instead of at home § many wealthy people in developing countries invest their savings in the U. S. or Europe (richer countries with more stable political systems) because doing so offers a higher return and/or less risk § as a result, these funds are not used to develop capital at home (in the poor country) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Impediments to Achieving Growth 2. Difficulties in developing human resources • poor health outcomes degrade human resources § 2019: 409, 000 malaria deaths (94% in Africa) § 2019: 690, 000 AIDS-related deaths (64% in Africa) • brain drain – tendency for the most highly talented people from developing countries to become educated and then move to an already wealthy country § highly talented doctor, engineer, scientist can earn much more in an IAC (e. g. , U. S. , Germany, Japan) than in a third world country => the most talented workers are skimmed off the top of the labor force in a poor country KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Impediments to Achieving Growth 3. Poor legal, political, and economic institutions • Rule-of-Law – an environment in which property rights and contracts are respected and administered fairly and transparently, without favoritism § countries with poor track records of maintaining rule-of-law have difficulty achieving growth KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Impediments to Achieving Growth 3. Poor legal, political, and economic institutions (continued) • Crony Capitalism – environment in which well-connected unscrupulous business people use corrupt political systems to their advantage to obtain preferential treatment from government (e. g. , government contracts, subsidies, bailouts, tax loopholes) § In such an environment, the efficient use of resources is distorted to the detriment of economic growth • Government ownership/control of productive resources (i. e. , a reliance on planning instead of markets, socialism instead of capitalism) § government ownership removes profit motive => reduced incentive to create value and innovate to reduce costs (dampening economic growth) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH OBSERVATIONS TO ILLUSTRATE THE IMPORTANCE OF INSTITUTIONS historically, the USSR, Cuba, and North Korea are three of the countries that most fully embraced command planning (as opposed to markets) KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH USSR v. Western Europe: USSR operated under command control planning; Western Europe had a market based mixed economy => difficulties of central planning caught up with the USSR after WW-II Real GDP Per Capita in the Soviet Union & Western Europe, 1917 to 1991: 18 000 Western Europe 16 000 14 000 12 000 10 000 8 000 6 000 USSR 4 000 2 000 31 19 33 19 35 19 37 19 39 19 41 19 43 19 45 19 47 19 49 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 29 19 27 19 25 19 23 19 21 19 19 19 17 0 KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH Puerto Rico, Panama, Cuba, Venezuela: similar culturally; similar levels of Per Capita GDP in 1950; drastically different economic systems after Cuban Revolution (in 1953) Real GDP Per Capita in Puerto Rico, Panama, and Cuba, 1950 to 2018: 35 000 Puerto Rico 30 000 25 000 Panama 20 000 15 000 10 000 5 000 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 - KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS Venezuela Cuba
ECONOMIC GROWTH North Korea v. South Korea: nearly identical before country was arbitrarily split in two in 1953; command planning instituted in NK, while SK embraced free markets in early 1970 s Real GDP Per Capita in North Korea & South Korea, 1953 to 2018: 40 000 South Korea 35 000 30 000 25 000 20 000 15 000 10 000 5 000 North Korea 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 20 11 20 13 20 15 20 17 19 19 19 53 55 - KENNESAW STATE UNIVERSITY | COLES COLLEGE OF BUSINESS
ECONOMIC GROWTH
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