Long-Run Economic Growth

12 Key excerpts on "Long-Run Economic Growth"

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  eBook - PDF

  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  PART II The Long Run 69 Chapter 5 Long-Run Economic Growth Why are some nations rich and others poor? Why do standards of living sometimes rise quickly and other times slowly . . . or not at all? Economists answer these questions with models of economic growth. Economies can produce more output—become richer—when there are more inputs or when the inputs’ productivity rises. KEY TERMS AND CONCEPTS • Growth • Growth rate of the economy • Rule of 70 • Aggregate production function • Capital-labor ratio • Constant returns to scale • Scale of production • Economies of scale • Increasing returns to scale • Diseconomies of scale • Decreasing returns to scale • Growth accounting • Residual growth • Total factor productivity (TFP) • Labor productivity • Capital productivity • Capital stock • Investment • Depreciation rate • Human capital • Property rights • Intellectual property rights • Productivity growth slowdown • Productivity growth resurgence 71 72 Chapter 5 Long-Run Economic Growth KEY EQUATIONS • Real GDP per capita • Rate of change • Aggregate production function KEY GRAPH • Aggregate production function WHAT IS GROWTH? Economists use the word “growth” in two different contexts: short-run and long- run contexts. For macroeconomists, the short run is a period of a few months to a few years. Macroeconomists who focus on the short run use the term growth to refer to changes in real GDP from quarter to quarter, or year to year. Some use the phrase “growing the economy” to refer to policies or events that make real GDP increase over the short run. The long run is a period of a decade or a generation. Long-run growth refers to changes from decade to decade, or generation to generation. Changes in what? Unfortunately for students, there are two answers. Some economists and text- books use one definition of long-run growth; others use the other.

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  Macroeconomics For Dummies

  • Dan Richards, Manzur Rashid, Peter Antonioni(Authors)
  • 2016(Publication Date)
  • For Dummies

    (Publisher)

  Part 3

  The Long-Run Macro Economy

  IN THIS PART … Understand the importance of economic growth and the determination of the economy’s long-run growth path. Discover that in the long run, inflation is determined by money growth. Discover that in the long run, real interest rates primarily reflect households’ willingness to save. Passage contains an image Chapter 8

  GDP Growth in the Long Run

  IN THIS CHAPTER Compounding growth: The rule of 70 Marginalizing firm decisions Growing GDP over time Steadying the state

  We’ve said it before and we’ll say it again: Economists love models. Building an economic model and considering its implications forces you to think hard about which assumptions lead to which results and whether those assumptions make sense. And it’s only after you have a model that you can begin to test it with evidence.

  Some of the time, or maybe most of the time, economists disagree at one or more of these stages. They argue over assumptions. They argue over the empirical evidence. They argue over arguing. But in macroeconomics, one area where economists don’t argue too much is about the nature of the long run. There is a lot of agreement about the economy’s long-run behavior and which macroeconomic policies will promote a healthy long-run growth path.

  That long-run path is an anchor — a full equilibrium. It is in fact the potential output described in Chapter 3 , because it reflects full employment of the economy’s capital and labor resources. Whatever happens in the short run, there are forces (sometimes weak but always present) that pull the economy back toward that potential. Put somewhat differently, recessions can cause the economy to drift away from its long-run equilibrium for some time and by a significant amount. But ultimately the economy always returns to that long run, full-employment path.

  In this chapter, you’ll hear about the long-run growth model that most macroeconomists think works for modern economies like the U.S. You’ll also get an idea of the critical but complicated role that society’s willingness to save plays in that model — and what the long-run equilibrium says about interest rates and the price of credit as well.

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  Modelling the Growth of Corporations

  Applications for Managerial Techniques and Portfolio Analysis

  • J. Solvay, Michéle Sanglier, P. Brenton(Authors)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2 Economic Analysis of Growth: A Review 2.1 INTRODUCTION Traditional economics has concentrated upon analysing economic growth at the aggregate or national level. The principal objective has been to explain the sustained growth of living standards in indus- trial countries and why the long-run rate of growth has varied across countries, particularly when the standard theory predicts that countries will tend to converge to the same long-run trend rate of growth. The key factor generating sustained growth within the traditional or neo-classical model is technological change. However, technological progress in the famous Solow model is exogenous in the sense that it just appears and is not generated by the actions or decisions of eco- nomic actors in the market. Later developments of this theory pro- vided for a public research sector to provide new technologies to the industrial sector, which itself undertook no research. In the 1990s attention focused upon how technological change might be generated within the economic system and how this affected the rate of economic growth. This `endogenous growth theory' shows how investment in R&D (the production of new ideas) and the quality of the labour force in terms of education and training (the level of human capital) can engender consistent long-run growth of income per person. Little concern has been given in standard economics to the growth of firms. This is because the traditional economic theory of the firm is concerned with the static allocation of resources and the conditions which generate a welfare-maximising equilibrium outcome. Thus, the firm, which is itself a vaguely defined concept, is analysed only from the point of view of understanding the problem of price determination and how the resources of an economy can be allocated in the most efficient way between alternative uses.

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  Development Economics

  Theory, Empirical Research, and Policy Analysis

  • Julie Schaffner(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  chapter Economic Growth At the micro level of developing-country households, the objective in development is to raise well-being. At the macro level, the aim is to raise well-being not just for one household but for many and to raise well-being in a way that can be sustained and built upon over many years. Most development thinkers agree that widespread and sustained improvements in well-being are impossible without economic growth. This chapter begins by defining economic growth, describing how it is measured, and examining how it relates to the larger development objective. It then demonstrates the tremendous variation in rates of economic growth across countries and raises the natural question: What causes rapid economic growth? We begin answering this question by describing the proximate sources of growth, which are the economic processes through which economic growth comes about. Digging deeper, the chapter then raises questions about the “determinants of economic growth,” which are features of policy and of socioeconomic conditions that explain why growth rates are higher in some countries than others or why growth rates change over time within countries. We briefly review the large empirical literature employing aggregate-level cross- country data in the search for the determinants of growth, pointing out its lessons and limitations. We then argue the need for careful micro-level, context-specific analysis of barriers to growth and of the ways they might be overcome. Part III of the text equips readers for such analysis. 3.1 Meaning and Measurement of Economic Growth 3.1A The definition and developmental significance of economic growth The rate of economic growth is the rate of increase in an economy’s average income. In principle, average income is the total value of income earned in any form, from any source, by anyone in the country, divided by the number of people. Economic growth thus takes place when total income grows faster than the population.

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  Development Economics

  Theory and Practice

  • Alain de Janvry, Elisabeth Sadoulet(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER EIGHT Explaining Economic Growth: The Macro Level T HE G ROWTH P UZZLE We have seen that economic growth is the cornerstone on which economic development is built (Chapter 1). We have also seen that growth performance across nations has been highly unequal, with some developing countries converging in per capita income with industrialized countries while others have been lagging behind, leading to the concept of conditional convergence (Chapter 2). And we have seen that finding ways to catch up with industrialized countries has been a primary objective in the long history of thought in development economics (Chapter 3). Yet our ability to explain economic growth, a central purpose of economics as a science, is highly deficient, leaving us with what has been called the “mystery of economic growth” (Helpman, 2004) and the “elusive quest for growth” (Easterly, 2002). What we know is that output growth basically depends on two determinants: (1) factor accumulation (labor, capital, materials, land) and the way these factors are combined in production for a given technology, as represented by the production function; and (2) gains in factor productivity deriving from how technology, institutions, and factor quality change over time. However, what drives factor accumulation and especially gains in factor productivity remains highly contentious. With growth, as with the other dimensions of economic development, we are interested in both the positive analysis of growth (what explains economic growth) and its normative analysis (what can be done to accelerate growth). To answer these questions, economists use economic models and take these models to the data for estimation, simulation, and predictions. In the quest to explain income growth, we will meet two families of models: classical and neoclassical growth models with exogenous technological change, and endogenous growth models with technological change an outcome of economic decision-making.

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  Economic Growth

  • Steven Durlauf, L. Blume, Steven Durlauf, L. Blume(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  economic growth in the very long run The evolution of economies during the major portion of human history was marked by Malthusian stagnation. Technological progress and population growth were minuscule by modern standards, and the average growth rates of income per capita in various regions of the world were even slower due to the offsetting effect of population growth on the expansion of resources per capita. In the past two centuries the pace of technological progress increased significantly in association with the process of industrialization. Various regions of the world departed from the Malthusian trap and experienced a considerable rise in the growth rates of income per capita and population. Unlike episodes of technological progress in the pre-Industrial Revolution era that failed to generate sustained economic growth, the increasing role of human capital in the production process in the second phase of industrialization ultimately prompted a demographic transition, liberating the gains in productivity from the counterbalancing effects of population growth. The decline in the growth rate of population and the enhancement of human capital formation and technological progress paved the way for the emergence of the modern state of sustained economic growth. Variations in the timing of the transitions from a Malthusian epoch to a state of sustained economic growth across countries lead to a considerable rise in the ratio of GDP per capita between the richest and the poorest regions of the world from 3:1 in 1820 to 18:1 in 2000 (see Figure 1). 0 4,000 8,000 12,000 16,000 20,000 24,000 0 250 500 750 1,000 1,250 1,500 1,750 2,000 GDP per capita (1990 int'l$) Western Europe Western Offshoots Asia Latin America Africa Eastern Europe Figure 1 The evolution of regional income per capita, 1–2000. Source: Maddison (2001).

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  Development Economics

  • Gérard Roland, Gerard Roland(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  In the second half of the 18th century, Great Britain industrialized its economy, followed in the 19th century by the United States and Europe. Japan, which had been isolated from the rest of the world for centuries and deeply mired in its feudal traditions, started growing very rapidly at the end of the 19th century. As a result of its economic strength, it was able to create a powerful military that defeated Russia’s tsarist army in 1905 and went on to invade and occupy China and large parts of Asia in the 1930s and 1940s. After Japan’s defeat in World War II, its economy continued to develop very rapidly, with GDP growing at 9% on average between 1950 and 1970. Other Asian countries (Taiwan, South Korea, Hong Kong, and Singapore) experienced rapid growth in the 1960s and 1970s by following the Japanese model of an export-oriented economy. Since the 1980s, China, the most populous country in the world, has had GDP growth of nearly 10% per year. As the Chinese “miracle” has unfolded over the past decades, income per capita has increased by a factor of 10. India has also started to grow vigorously since the end of the 20th century. Underscoring the power of these two emerging economies, India and China together include more than one-third of the world population.

  It is important to distinguish between economic development and economic growth.

  Economic development

  refers to improvements in living standards and in the quality of life, while

  economic growth

  measures only growth in economic production. Economic growth may not accurately reflect all aspects of economic development because growth often results in negative effects on the quality of life such as pollution and urban congestion. Nevertheless, economic development cannot take place without economic growth. Growth is thus fundamental to development.

   

  I

  n this chapter, we introduce some important economic concepts to consider when discussing economic growth. We then review two very important theories of economic growth that explain the capital accumulation process. We will show that these theories, and others, based on capital accumulation explain only a small part of the differences in growth among countries. We then discuss the empirical evidence for the main causes of growth and highlight two important explanations for why some countries are so wealthy and others are so poor: geography and institutions. Currently, economists believe that institutions are central to understanding economic performance and economic growth in developing countries. The impact of institutions on growth will continue to inform our discussion of institutions throughout the remainder of the book.

  Growth and Factors of Production

  When we analyze the sources of economic growth, the first thing we must consider is the contribution made by the factors of production.

  Factors of Production

  Consider the output of a firm producing T-shirts. The firm generates output by combining labor and capital (machines, buildings, trucks). Labor and capital are critical factors in the creation of value and in the production of output in an economy. In our example, not a single T-shirt could have left the workshop floor without the combination of labor and capital, which are

  factors of production

  .1

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  It is not clear what productivity growth will be in the coming years. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita. 186 7 • Key Terms Access for free at openstax.org Compound interest and compound growth rates behave in the same way as productivity rates. Seemingly small changes in percentage points can have big impacts on income over time. 7.3 Components of Economic Growth Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. Capital deepening refers to an increase in the amount of capital per worker, either human capital per worker, in the form of higher education or skills, or physical capital per worker. Technology, in its economic meaning, refers broadly to all new methods of production, which includes major scientific inventions but also small inventions and even better forms of management or other types of institutions. A healthy climate for growth in GDP per capita consists of improvements in human capital, physical capital, and technology, in a market-oriented environment with supportive public policies and institutions. 7.4 Economic Convergence When countries with lower GDP levels per capita catch up to countries with higher GDP levels per capita, we call the process convergence. Convergence can occur even when both high- and low-income countries increase investment in physical and human capital with the objective of growing GDP.

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  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  Laws must be clear, public, fair, and enforced, and applicable to all members of society special economic zone (SEZ) area of a country, usually with access to a port where, among other benefits, the government does not tax trade technological change a combination of invention—advances in knowledge—and innovation technology all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products Key Concepts and Summary 20.1 The Relatively Recent Arrival of Economic Growth Since the early nineteenth century, there has been a spectacular process of Long-Run Economic Growth during which the world’s leading economies—mostly those in Western Europe and North America—expanded GDP per capita at an average rate of about 2% per year. In the last half-century, countries like Japan, South Korea, and China have shown the potential to catch up. The Industrial Revolution facilitated the extensive process of economic growth, that economists often refer to as modern economic growth. This increased worker productivity and trade, as well as the development of governance and market institutions. 20.2 Labor Productivity and Economic Growth We can measure productivity, the value of what is produced per worker, or per hour worked, as the level of GDP per worker or GDP per hour. The United States experienced a productivity slowdown between 1973 and 1989. Since then, U.S. productivity has rebounded for the most part, but annual growth in productivity in the nonfarm business sector has been less than one percent each year between 2011 and 2016. It is not clear what productivity growth will be in the coming years. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita.

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  Modern Economic Thought

  • Sidney Weintraub(Author)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  24 Population: The Economics of the Long Run RICHARD A. EASTERLIN To the classical economists of the early nineteenth century, econom-ics foretold the future of society. Population growth and technological change formed an integral part of economic reasoning. In the course of time, however, economics came increasingly to center on short-run problems of resource allocation under given conditions of population and technology. W. S. Jevons' view, enunciated in his classic work of 1871, that population . . . forms no part of the direct problem of Eco-nomics came increasingly to prevail. 1 As time went on, students seeking professional training in economics could easily go through the core curriculum with the word population mentioned rarely, if at all. Only recently, as economics has been forced once again to confront questions of the long-term future of society, has the eco-nomics of population become a serious, albeit not (yet) central, con-cern of the discipline. Interestingly, this has occurred chiefly by the assimilation of population study to that of resource allocation. The Effects of Population Growth The rise and fall of classical theory To popular exponents of the population bomb, as to many writers well before Malthus, the economic consequences of population 1 W. Stanley Jevons, The Theory of Political Economy, 5th ed. (reprint ed., New York: Augustus M. Kelley, 1965), p. 266. 485 4 8 6 RICHARD A. EASTERLIN growth were breathtakingly obvious. The potential for population growth through natural increase was viewed as far in excess of the potential for output growth, due to the limitation of land area. Malthus himself put it this way: Taking the whole earth . . . the human species would increase as the numbers 1, 2, 4, 8, 16, 32, 64, 128, 256 and subsistence as 1, 2, 3, 4, 5, 6, 7, 8, 9. In two centuries, the popula-tion would be to the means of subsistence as 256 to 9.

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  Intermediate Macroeconomics

  • Robert J. Barro; Angus C. Chu; Guido Cozzi, Robert Barro, Angus Chu, Guido Cozzi(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  That is, the blue curve also describes the transition from the initial real GDP per worker, y (0), to its steady-state value, y * . Summing Up We began our study of economic growth with observations about the importance of growth for standards of living. Now we have constructed the Solow growth model and are ready to work with it to understand how economic vari -ables influence growth. We will begin to put the model to use in Chapter 4. Key Terms and Concepts average product of capital capital stock constant returns to scale diminishing average product of capital diminishing marginal product of capital diminishing marginal product of labour gross investment growth accounting human capital inequality labour force labour-force participation rate marginal product of capital (MPK) marginal product of labour (MPL) neoclassical growth model net investment population growth poverty production function productivity productivity slowdown Ramsey model rate of economic growth saving Solow growth model standard of living steady state technology level transition path Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 50 Part two Economic growth Questions and Problems A R eview questions 1 Explain why an increase in capital per worker, k , reduces the growth rate of capital per worker, Δ k/k . How does this result depend on diminish-ing productivity of capital? 2 Does a positive saving rate, s > 0, mean that output per worker, y , grows in the long run? Explain. 3 What is a production function? In what way does it represent a relation between factor inputs and the level of output? 4 Does a positive saving rate, s > 0, mean that capital per worker, k , rises over time? Explain by referring to equation (3.16). 5 Explain the concepts of marginal and aver-age products of capital.

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  The Chinese Macroeconomy and Financial System

  A U.S. Perspective

  • Ronald M Schramm(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  “Basic growth” refers to raw economic growth that may or may not create value, while “advanced growth” refers to sustainable, value-creating growth. “Intermediate growth” represents economies with more sustainable growth rates than basic, but in which economies are unlikely to achieve the per capita income levels found in the industrialized economies. * Some countries (e.g., North Korea) have not even achieved basic growth, due to enormous political and institutional constraints. As we move from basic to advanced economic growth, we shift to more sophisticated, rule-based, research-intensive economies (what Porter calls “advanced factors”). Importantly, we are moving toward societies in which institutions provide the levels of trust and security necessary to allow for ever-more complex economic transactions and relationships. Countries that have achieved basic economic growth may encounter bottlenecks to achieving more sustainable economic growth if legal and regulatory frameworks are not present. In effect, we are moving from basic economies with the necessary “hardware” for economic growth to more advanced economies that have the necessary institutional “software.” Economies including the United States have achieved advanced economic growth but are always wary of slipping back into lower stages. Meanwhile, China arguably is at an intermediate economic stage and is working to develop the institutional “software” to move to a higher, more sustainable growth path. Table MF4.4a We could classify all countries at different stages of economic growth

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