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Economic Growth

Economic Growth. Assorted Topics. Before the Industrial Revolution. Up until 1500, there had been almost zero growth of output per worker After 1800, we see large sustained increases in worldwide standards of living population growth accelerated output per capita grew.

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Economic Growth

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  1. Economic Growth Assorted Topics

  2. Before the Industrial Revolution • Up until 1500, there had been almost zero growth of output per worker • After 1800, we see large sustained increases in worldwide standards of living • population growth accelerated • output per capita grew

  3. Economic Growth through Deep Time

  4. World Population Growth since 1000

  5. Premodern Economies • There are two principal reasons that there were no sustained increases in the productivity of labor before 1500 • resource scarcity • expanding populations

  6. Premodern Economies • Remember that Y/L depends on two factors • the economy’s capital intensity (K/Y) • the efficiency of labor (E) • The level of Y/L is therefore

  7. Premodern Economies • Also remember that, in the long run, K/Y tends to approach an equilibrium • sustained growth must be driven by sustained increases in the efficiency of labor • If productivity does not grow, it must be because labor efficiency did not grow

  8. Premodern Economies • Natural resources played an important role • as populations grew, the stocks of natural resources had to be divided among more and more people • increases in technological capability induce increases in fertility that inevitably run into natural-resource scarcity

  9. Premodern Economies • Thomas R. Malthus • first academic professor of economics • introduced the idea that increases in technology inevitably run into natural resource scarcity • implies that increases in technology lead to an increase in the size of the population but not to an increase in the standard of living

  10. The End of theMalthusian Age • We no longer live in a Malthusian age • for at least 200 years, new technologies and better organizations have made improvements in the efficiency of labor possible • these improvements have not been neutralized by natural-resource scarcity

  11. The End of theMalthusian Age • However, a Malthusian age may return • suppose that the population in the 21st and 22nd centuries grows at the same rate it did in the 20th century (1.33%) • the population will double in 72/1.33 = 54 years • In 200 years, there would be nearly 90 billion people on earth

  12. The End of theMalthusian Age • It is likely that the population explosion is almost over • the United Nations predicts that the world population will grow from over 7 billion today to around 10 billion by 2050 • after that, the population increase may stop as birth rates have been on the decline around the world

  13. The End of theMalthusian Age • What caused the end of the Malthusian age? • the pace at which inventions occurred increased steadily • by about 1500, technological progress passed the point at which it could offset increased scarcity of natural resources due to population growth

  14. The Demographic Transition • As material standards of living rise far above subsistence, countries undergo a demographic transition • birth rates rise • death rates fall • birth rates fall

  15. Stylized Picture of the Demographic Transition

  16. The Demographic Transition • In the world today, not all countries have gone through their demographic transitions • Nigeria, Iraq, Pakistan, and the Congo are projected to have population growth rates greater than 2% per year over the next generation

  17. Expected Population Growth Rates, Present-2020

  18. Expected Population Growth Rates, 1997-2015

  19. The Industrial Revolution • The industrial revolution began the era of modern economic growth • new technological leaps revolutionized industries and generated major improvements in living standards • Great Britain was the center of the industrial revolution • English became the world’s de facto second language

  20. The Industrial Revolution • The new technologies were not confined to Great Britain • they spread rapidly to western Europe and the United States • they spread less rapidly to southern and eastern Europe and Japan

  21. Industrialized Areas of the World, 1870

  22. The Industrial Revolution • Why did the Industrial Revolution take place in Great Britain and why did it occur around 1800? • the establishment of limited government, security of property, and freedom of contract in Great Britain after the Glorious Revolution of 1688 • the creation of modern science and the technological tradition of sustained inquiry into how the world worked

  23. American Long-Run Growth, 1800-1973 • Growth in the second half of the 19th century was faster than it had been in the first half • Growth accelerated further in the early part of the 20th century • a second wave of industrialization occurred from new inventions and innovations

  24. American Long-Run Growth, 1800-1973 • During the late 19th century, the capital-output ratio increased greatly • the creation of railroads generated the possibility of supplying an entire continental market from a single factory • this encouraged investment by entrepreneurs

  25. American Long-Run Growth, 1800-1973 • Growth slowed slightly during the Great Depression and World War II • 1.4 percent per year from 1929 to 1950 • Growth accelerated from 1950 to 1973 (2.1 percent)

  26. U.S. Measured Economic Growth: Real GDP per Worker 1995 Prices,1890-2004

  27. American Long-Run Growth, 1800-1973 • Next to none of the growth since 1929 was the result of increases in K/Y • almost all of it was the result of increases in the efficiency of labor

  28. American Long-Run Growth, 1800-1973 • Many economists believe that official estimates of output per worker overstate inflation and understate real economic growth by 1 percent per year • national income accountants have a hard time valuing the boost to productivity and standards of living generated by new inventions

  29. Labor-Time Costs of Commodities, 1895-1997

  30. American Long-Run Growth, 1800-1973 • Structural changes also occurred • a large drop in the proportion of the labor force working as farmers occurred • new methods of travel were developed • a large number of innovative technologies and business practices were adopted

  31. American Long-Run Growth, 1800-1973 • The U.S. became the world’s leader (in terms of technology) during the 20th century because • the U.S. had an exceptional commitment to education • the U.S. was the largest market in the world • the U.S. was extraordinarily rich in natural resources • the U.S. avoided fratricide

  32. American Economic Growth Since 1973 • Between 1973 and 1995 measured output per worker grew at only 0.6 percent per year • between 1950 and 1973, labor productivity growth had been 2.1 percent per year • The other major industrial economies in western Europe, Japan and Canada also experienced a slowdown in productivity

  33. The Magnitude of the Post-1973 Productivity Growth Slowdown in the G-7 Economies

  34. Modern Economic Growth around the World • The industrial core of the world economy experienced a large increase in its level of material productivity and living standards during the 19th and 20th centuries • Elsewhere the growth of productivity levels and living standards was slower • The world has become a more and more unequal place

  35. World Distribution of Income Today, Selected Countries

  36. World Distribution of Income Today, Selected Countries

  37. Modern Economic Growth around the World • The U.S. has not been the fastest-growing economy in the world • a number of other countries at different levels of industrialization, development, and material productivity a century ago have now converged • their current levels of productivity, economic structures, and standards of living are very close to those of the U.S.

  38. Convergence among the G-7 Economies: Output per Capita as a Share of U.S. Level

  39. Modern Economic Growth around the World • By and large, the economies that have converged belong to the Organization for Economic Cooperation and Development (OECD) • group of countries that gave or received aid under the Marshall Plan to help rebuild or reconstruct after World War II

  40. Modern Economic Growth around the World • The OECD countries adopted a common set of economic policies • large private sectors free of government regulation of prices • investment with its direction determined by profit-seeking businesses • large social insurance systems to redistribute income • governments committed to avoiding mass unemployment

  41. Modern Economic Growth around the World • The OECD countries ended up with mixed economies • markets direct the flow of resources • governments stabilize the economy, provide social-insurance safety nets, and encourage entrepreneurship and enterprise

  42. Modern Economic Growth around the World • As the OECD countries became richer, they completed their demographic transitions • The policy emphasis on free enterprise boosted investment • Equilibrium capital-output ratios rose • Diffusion of technology from the U.S. occurred

  43. Modern Economic Growth around the World • Economic growth has not been limited to OECD countries • since World War II, several countries in east Asia have experienced stronger growth than has ever been seen anywhere in world history • these successful east Asian countries are somewhat similar to the OECD economies in terms of economic policy and structure

  44. Modern Economic Growth around the World • Many countries have not been so fortunate • Countries that have been ruled by communists in the 20th century have remained poor

  45. The Iron Curtain: GDP-per-Capita Levels of Matched Pairs of Countries

  46. Modern Economic Growth around the World • Individuals living in countries outside of the Iron Curtain have higher levels of GDP-per-capita • they may not have better education, health care, or a more favorable income distribution

  47. Modern Economic Growth around the World • Even if attention is confined to noncommunist-ruled economies, there has still been enormous divergence in relative output-per-worker levels over the past 100 years

  48. Sources of Divergence • The principal cause of the large variation in output per worker between countries today are differences in their equilibrium capital-output ratios • K/Y is determined by • the level of investment • the growth rate of the labor force

  49. Sources of Divergence • Two secondary causes of the large variation in output per worker between countries today are • openness to creating and adapting the technologies that enhance the efficiency of labor • the level of education today

  50. GDP-per-Worker Levels and Average Years of Schooling

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